Will the “Rout” in Government Bonds Turn into Carnage?

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“Inflation Trade” Heats Up, “Greater-Fool” Trade Falls Apart

The Government “bond rout” didn’t start with Trump’s election victory. It started in July. And it didn’t just hit US Treasuries. It hit government bonds around the world. It’s predicated on the idea that inflation was raising its ugly head again. That idea has now become further entrenched.

The threat of inflation puts holders of low-yielding or zero-yielding long-term bonds in a very foul mood because the purchasing power of their capital gets destroyed without compensation.

It hit US Treasuries particularly hard. Central banks can push down long-term rates by buying bonds. The ECB and the Bank of Japan are doing that. But the Fed has been flip-flopping about raising rates. There is a good chance it will raise them another notch in December, from nearly nothing, by almost nothing, to next to nothing. So it isn’t going to revolutionize short-term rates. But it does point out that long-term rates in the US are on their own.

Then Trump won. He’d campaigned on a big deficit-funded stimulus program that includes a military buildup and – by golly, much needed – infrastructure work, funded, so to speak, by corporate and individual tax cuts….

The US bond markets reacted with a vengeance. They figured that these plans, once they sail through the Republican Congress, would create much larger deficits which would have to be funded by an onslaught of new bonds that somebody would have to buy, and that somebody wouldn’t be the Fed.

Dreading this supply, bond traders went out and cut great-big holes into the most magnificent bond bubble in history, and what we’ve been hearing since this act of Fed-defying vandalism is the deafening sound of hot air hissing out of it.

Today, Veterans Day, the US bond markets are closed, which may be a good thing. It gives them an extra day to take a breath. Because over the last three trading days, the US 10-year yield has skyrocketed 35 basis points, from 1.8% to 2.15%. That’s a huge move (chart via StockCharts.com):

us-treasury-10-yr-yield-2016-11-10

Since early July, the 10-year yield has jumped by 77 basis points. So what does this mean for bondholders, in dollars and cents? Bond prices fall when yields rise. This chart (via StockCharts.com) shows the CBOT Price Index for the 10-year note. It’s down 4.5% since July.

us-treasury-10-yr-price-2016-11-10

It gets outright ugly with 30-year Treasury bonds. Over the last three trading days, the 30-year yield has soared by 38 basis points and since early July by 83 basis points (via StockCharts.com):

us-treasury-30-yr-yield-2016-11-10

In terms of dollars and cents, the CBOT Price Index for 30-year bonds has plunged 12% since early July!

us-treasury-30-yr-price-2016-11-10

To lose 12% in four months on an investment that yields less than 3% annually, is “risk free” in terms of default, and is considered among the most conservative investments in the world, is a big nut to swallow.

This week, globally, the market value of Bank of America’s Global Broad Market Index, tracking over 24,000 bonds, has plunged by $1.14 trillion to $48.1 trillion, according to Bloomberg. The only prior time it had plunged by over $1 trillion in one week was in June 2013, during the “Taper Tantrum,” when Bernanke suggested QE Infinity might not be for infinity after all.

This has become part of what is now called the “inflation trade.” The logic is that already rising inflation will meet Trump’s fiscal stimulus and additional deficit spending, and that there is no deadlocked Congress to prevent it.

It would come on top of the massive current stimulus and deficit spending, funded over the past 24 months with a net increase in Treasury debt of $1.85 trillion (I look at this in terms of 24 months to eliminate the distorting effects of the debt-ceiling fight in 2015). That’s an increase of indebtedness of on average $925 billion per year. Trump’s plans would push borrowing needs way beyond that.

The theory is that the Fed will see this too. Some Fed heads have already commented that they won’t be in denial on this topic. And once inflation gets more support from this additional stimulus spending, the Fed will raise short-term rates more sharply, which will push long-term yields up further.

Bonds will ultimately be redeemed at face value. That’s the best-case scenario. The worst case scenario is a default. So if bondholders paid over face value, which many of them did, they will face a guaranteed capital loss unless they can sell this thing to an even greater fool for more money.

But that greater-fool trade suddenly seems unlikely. While investors are holding this thing, knowing that at the end there will be a capital loss and that inflation will eat into the purchasing power of that face value, they will also have to endure minuscule coupon payments.

The bond market in the US is far larger than the stock market. And the impact of these losses will be felt far and wide. Unwinding a bond bubble that has ballooned now for over 30 years is a painful and costly process even if it happens in an orderly and gradual fashion and without a tsunami of defaults.

But inflation of this type has been predicted before, and the inflation trade has worked only briefly and sporadically before something happened – the price of oil collapsed, or whatever – and yields dropped again.

Also, the government bond rout has not yet impacted the high-yield market. Junk bonds may be where these folks are fleeing to, after having lost 12% in four months on 30-year US Treasuries. Maybe they’re thinking that junk bonds can’t get much worse than this, and the yields are far higher.

So skepticism abounds. Trump won’t take office till January. It will take a while to get this legislation put together and passed, if it can be done at all, given some lingering resistance in Congress to additional deficit-funded stimulus spending. So it wouldn’t surprise me if yields fall some back next week – on the theory that nothing goes to heck in a straight line.

But the markets can see too that this time, the stars are aligned more in favor of inflation, and in favor of rising long-term rates, and they can see the flood of new government debt. And unless Yellen is buying, they will have to. And they might demand to be paid for the now obvious the risks they’re taking.

This would be a good thing for a lot of people. But the entire asset-bubble economy, the way the Fed has put it together, is based on a super-low cost of capital. A major shift in long-term rates is not going to just pass by the rest of the economy, including the housing market and Corporate America.

There’s already trouble brewing beneath the surface. Foreclosures are suddenly spiking most since the last Housing Bust. Read… What the Heck’s going on with Foreclosures? Why this Spike?



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  82 comments for “Will the “Rout” in Government Bonds Turn into Carnage?

  1. Justme
    November 11, 2016 at 2:32 pm

    I really wonder what is going to happen in Muni bonds. Lots of people are holding lots of Muni bonds.

    • jack carpenter
      November 11, 2016 at 4:21 pm

      The Muni will collapse as they can not raise yields more, and gold is going to rise quickly to protect asset values.

    • Anon
      November 11, 2016 at 7:35 pm

      Muni bonds are going to drop in price along with Treasuries as interest rates rise. If you own individual bonds, you can just hold on to them until maturity if you want to. If you own a bond fund instead, you are at the mercy of the fund manager. If you had purchased shares in the Franklin California Tax Free Income Fund when they were first offered at $10 per share back in 1977, each share would have been worth only $7.54 (Net Asset Value) as of Nov. 10, 2016. You would also have received income from the fund over the past 39+ years.

    • d
      November 12, 2016 at 6:09 am

      Read Meredith Whitney on muins and believe everything, except her dates.

      Munis are worse than Treasurys, as when rates rise, the cant divert enough revenue, to refi the shortfall.

      • Dan Romig
        November 12, 2016 at 1:35 pm

        Agree. I sold my Closed-End Muni ETFs in mid July, and looking back, it was a good move. They did/do pay a nice dividend, but have been getting hammered recently.

        NMO NVG NZF VPV BTT

  2. November 11, 2016 at 2:59 pm

    Whether Mr. Trump or Ms. Clinton won it is entirely likely the outcome — “inflationary expectations” – – would have been downright similar, if not identical.

    Seriously — how could they ( whomever ) think Mr. Trump’s plans are inflationary — after virtually ignoring the ( quote from article ) “massive current stimulus and deficit spending, funded over the past 24 months with a net increase in Treasury debt of $1.85 trillion” ?

    Somehow that was not really inflationary, but another $100B or $200B per year beyond that $925B ( in each of the prior two years ) – – NOW THAT’S INFLATIONARY ?

    You ain’t seen nuttin’ yet ! Wait till the FED unwinds its ~$4T of holdings, and unleashes hell upon our economy ! Or perhaps foreign trillions of Corporate-held dollars are repatriated ? Or the Petro-dollar or Euro-dollar dies a sudden death, and the USA gets flooded with many of those ?

    Gonna be interesting !

    SnowieGeorgie

    • RepubAnon
      November 11, 2016 at 3:40 pm

      Had Hillary won, the House of Representatives would have been so busy drafting repeated Articles of Impeachment that they wouldn’t have had time to do much else. Plus, they’d have shut down the government between impeachment hearings.

      The Republicans know that they have to get the economy booming in orde to do well in the midterms – and they know that government spending will accomplish this. Remember what Dick Cheney said: “You know, Paul, Reagan proved that deficits don’t matter. We won the mid-term elections, this is our due.
      Remarks on Paul O’Neill (January 9, 2004) [Source: wikipedia, https://en.wikiquote.org/wiki/Dick_Cheney%5D

      Republicans only oppose deficit spending to hurt Democrats – they’re always happy to max out the credit cards on their own watch.

      • Ed
        November 11, 2016 at 4:17 pm

        Just as soon as they get all the recent financial regulations out of the way. They might impeach Trump too. Then they’ll pump up a nice bubble or two. With oil prices down now is a good time to do it.

      • Mary
        November 11, 2016 at 4:46 pm

        Everyone seems to be assuming that Trump is a rational adult who will now go about putting together an organized plan to govern the country.

        Unless his handlers have cloned him and the realDonaldTrump is locked in a basement somewhere, sooner or later the man’s vanity will be wounded, enraged tweets will fly and we’ll be off to the races. I give it 72 hours.

        • Chicken
          November 11, 2016 at 5:00 pm

          Be sure to keep us abreast, I’m still convinced there’s a brilliant businessman behind that unibrow.

        • VK
          November 12, 2016 at 4:19 am

          So as an “irrational” he somehow created a successful brand that has been built over 45 years and was the host of a highly successful TV show for 16 years! He then managed to beat the entire Republican establishment that fielded 17 highly qualified candidates including a Bush dynasty scion and then he managed to bring down HRC, the anointed one by our corporate and media overlords. Plus the man has never taken a drink in his life, nor has he ever smoked. Oh and did you read about how he negotiated a 40 year tax break on his first hotel in NYC?

        • EVENT HORIZON
          November 12, 2016 at 2:40 pm

          Take a good look at his walk up to his acceptance speech.

          Those were real tears in his eyes. He was overwhelmed. He was humble. He finally, after all his years, realized people like him and respect him.

          Many REAL Politicians turn rotten after they get the POWER. This man is going to become one of our best Presidents since deep down inside he was humbled and thankful.

          The reason for his bombastic approach to life, gilt glitter and snotty talk is from his low self esteem. I know it well. I suffer from that. When I discover somebody actually likes me, I am stunned, speechless (imagine that) and honored.

          Try it some day. Go up to the biggest blowhard you know and say. “I like you, I do”……………watch the reaction, or better the non-reaction.

        • Mary
          November 12, 2016 at 4:33 pm

          On the other hand, you can take him seriously. Russian dissident Masha Gessen does in a brilliant piece in the NYRB.

          http://www2.nybooks.com/daily/s3/nov/10/trump-election-autocracy-rules-for-survival.html

  3. greg
    November 11, 2016 at 3:37 pm

    This will be a major yield-spike problem for Draghi’s NIRP and his many defacto bankrupt EU countries!
    $$$ will flood out of EU bonds, driving prices lower and yields higher, while treasury prices go higher!

  4. Greatful again
    November 11, 2016 at 3:50 pm

    Maybe an extra $T per year could do it. Yet to be seen. Right now it’s pure speculation and hasn’t come to fruition as predicted by past spending. A GDP of $17T takes a lot of priming to get into escape velocity.

    • Chicken
      November 11, 2016 at 5:31 pm

      For years I’ve been hearing just confidence by itself can be the game changer. Unfortunately I have no formula or model to share as proof of concept.

      • d
        November 12, 2016 at 6:16 am

        ” Unfortunately I have no formula or model to share as proof of concept.”

        Yes you do

        Just look at the US stock and bond markets since late 08.

        Ultimately, Confidence in the FED, was the only thing priming that boom.

        Just as it is currently the only thing underpinning then Price of the US $.

        Now watch p45, destroy both.

        • Chicken
          November 12, 2016 at 5:29 pm

          Take a deep breath and try to calm down, it’s time to stop trying to mislead everyone.

    • Greatful again
      November 12, 2016 at 9:49 am

      Easy money that gets into the hands of the average wage earner will probably induce prices rising on things they decide to buy. QE was mostly focused on the stock market getting the benefit of the fed buying crap debt. If the gov spends a $T on infrastructure, it will have much broader effect on the economy, but what the recipients will do with the money is less known. Raw building materials will probably get a huge boost as it’s unavoidable spending.

  5. nick kelly
    November 11, 2016 at 4:02 pm

    I believe this bond route is one of the most predicted events in financial history. Hasn’t Bill Gross been saying this for many months?

    Betting on FURTHER declines in interest rates, when they are at this level is picking up nickels in front of a steam roller.

    Also note the sudden wave of criticism of the Fed for its ultra- low rate policy from some unexpected quarters. Hasn’t the IMF chimed in? I know UNCTAD did, an organization whose existence I had forgotten.

    • Chicken
      November 11, 2016 at 4:57 pm

      I guess the IMF remains silent until AFTER the major move is done and then arrives to bury survivors, as is customary?

      • Enquiring Mind
        November 13, 2016 at 10:24 am

        Don’t forget that IMF also likes to bayonet the wounded. They are reviled by governments around the world.

  6. Chicken
    November 11, 2016 at 4:50 pm

    I think the smart money has accurate polls and knew well ahead of time. I’ve read they own mainstream media, BTW

    • d
      November 12, 2016 at 6:30 am

      If smart money needs polls, then it aint smart money.

      Most smart money was either out or very well hedged going into this obviously unpredictable election, now they just decide which positions to close and start collecting.

      I wanted her to win not because I liked her, I dont, or I am a democrat/liberal. I am not, but because she offered stability and continuity, medium term.

      The world needed stability and continuity.

      The last thing p45 brings, is stability and continuity, as Junkers ravings as he sees his leverage over England disappearing in a p45 induced financial whirlwind prove.

      Junker will have to learn the hard way, you do not tell p45, what to do in public.

      Junker now needs England, he just dosent want to admit it. It will be amusing to watch him impersonate an agitated helicopter, if le penn wins in france. I hope she does.

      • Chicken
        November 12, 2016 at 5:39 pm

        “If smart money needs polls, then it aint smart money.”

        How is that an intelligent response? FWIW, I’ve moved on looking forward to the change we all thought was going to begin 8 years ago but didn’t and maybe you should to, as opposed to the pitiful waste of time trying to tear others down and sabotage.

  7. John M
    November 11, 2016 at 5:07 pm

    Well Druckenmiller has his portfolio sorted we’re now going into a “Growth” environment. LOL we’re not going into a debt environment LOL

  8. Chicken
    November 11, 2016 at 5:17 pm

    What medication is Dr. Copper prescribing? Surely those screaming out in horror at the election results must be able to assign a doom and gloom image to this price action?

    • Chicken
      November 11, 2016 at 5:23 pm

      Ha, Chile ETF fell a bit this week…. To me this opens up ARB potential.

    • polecat
      November 12, 2016 at 12:55 am

      Dr. Copper’s been taken over by the Thing ……. with a combed orange coif ….. ‘;]

  9. J. Origer
    November 11, 2016 at 5:26 pm

    The Fed has no compunction now about raising rates. As long as the democrats were leading and expected to win the Fed was reluctant to trigger a bond and stock market sell-off. Now the coast is clear and they can raise with impunity. The sell-offs will be Trump’s fault.

  10. jest
    November 11, 2016 at 5:47 pm

    I don’t get how massive spending on Infrastructure and Defense is good? Isn’t the problem debt? how can more debt be good? and if interest rates rise the cost to that debt will be equally huge right? I can put tape over the leaky hole many times, but eventually someone should figure out how to fix it.
    I don’t get this stuff at all! And the Dow hits an all time high and today the JNK junk bond spdr slices its 200 DMA on the downside?

    • November 11, 2016 at 6:51 pm

      Repairing and building infrastructure (roads, rail, etc.) is normally good for the economy because it enables commerce and people to move more efficiently. There is a real long-term payoff down the line. So it makes economic sense to borrow for big infrastructure projects….

      …IF and only IF these infrastructure projects are useful (no bridges to nowhere please!) and if the spending doesn’t get siphoned off by cronies and corruption.

      On the other hand, strangling infrastructure spending exacts a price from the economy because people and commerce can’t move efficiently.

      This is totally different from defense spending, where there is very little long-term benefit for the economy once the original money got spent. All that’s left over is the debt and no additional revenue to pay for it.

      • QQQBall
        November 11, 2016 at 7:13 pm

        Every infrastructure bill will be bloated with pork. The costs will exceed the value add. The road and bridge projects will be akin to $1,000 toilets. Geez, like the govt is gonna fix shit, just like they fixed healthcare.

      • jest
        November 11, 2016 at 9:48 pm

        thanks for the comment and explanation..very helpful!

      • Justme
        November 11, 2016 at 10:58 pm

        Very much agree with Wolf that infrastructure spending must be GOOD infrastructure spending. Otherwise it is just debt with zero benefit. Might as well just spread helicopter money to construction companies (or better: construction workers).

        My personal pet peeve is airports. We don’t need any more stinking airports, and we most certainly do not need any stinking fancy new terminals named after some A-hole politician. All those self-important twerps that fly all the time and need fancy terminals to glorify their ego should go fly a kite!

        Another example: Build GOOD ,MODERN , SUSTAINABLE nuclear power plants, not god-damned tar-sand oil pipelines to nowhere and no-longer-useful locations.

        • polecat
          November 12, 2016 at 1:05 am

          Up-graded commuter rail service expansion would, I think, be a highly beneficial long term investment … rather than putting wasted $$$ into ever more lanes of highways and byways’ which will only continue to become clogged ! ….. more bang for the buck, as it were ….

      • bob
        November 11, 2016 at 11:12 pm

        If the economy is collapsing, infrastructure is a waste of resources.

        • November 12, 2016 at 12:10 am

          Or maybe it’s the other way around?

        • nick kelly
          November 12, 2016 at 12:13 pm

          If the infrastructure collapses, the economy MUST collapse.

          If you are dying- food is arguably a waste of money.
          But if you don’t eat you will certainly die.
          So you may as well eat and maybe you will recover

          However it hasn’t collapsed yet and it actually has quite a way to go. Blogger Econcat 88 has been very critical of Toledo’s roads, and has some good video of nasty pot holes.
          But when he says they are Third World he exaggerates.
          It is common in rural Nigeria and others for the ‘road’ to be so bad that four- wheel drives use the side of the road. This hurts the economy.

          The bridge is such a key item of infrastructure that they are often targeted in war. Tactically. the pursuing aggressor tries to blow the bridge before the fleeing army can get across, then the latter tries to blow the bridge once its over.

          Strategically, bridges are targeted to hurt the economy, but they were tough targets to destroy from the air up until smart bombs.

          A certain level of infrastructure spending is never a waste, because everything else depends on it.
          The problem is that, because of this, the word ‘infrastructure’ acquires a ‘motherhood’ halo and it is deemed to be always good.
          But it is VERY expensive and rarely purchased in a true market-
          roads cannot be pre-fabricated and imported. Even if they could be, politicians would oppose them.

          Decisions about routes are notoriously subject to extraneous influence that have nothing to do with practical reasons.

          At one stage near Rome the Auto- Strada super highway begins
          turning back and forth for no apparent reason. It is heading to bits of land once owned by the Vatican, that were sold to the state at exorbitant cost.

      • Realist
        November 12, 2016 at 7:02 am

        One minor problem is that the total amount of debt in the system already is so huge. And it seems that the more debt, the less increase in GDP per dollar of debt. Maybe real investment in infrastructure will pay off better than the debt hitherto has done, after all, crumbling infrastructure is an effective brake on the real economy.

        • nick kelly
          November 12, 2016 at 2:26 pm

          The diminishing return on deficit spending is well documented.
          A decade or two ago each dollar of govt spending produced about 3 $ of spin off or multiplier effect increase in GDP ( itself a highly dubious measure of useful economic growth)
          This is now down to less than a dollar- so given that it has to be paid back, or at least interest has to be paid, it is doubtful that there is any use to more spending, except where necessary.

      • prepalaw
        November 12, 2016 at 10:13 am

        Wolf,

        agree on defense spending.

        Infrastructure spending will not achieve the goal of putting more money the pockets of average Americas. Infrastructure components are fabricated in automated factories and installed by complex machines and not tens of thousands of ditch diggers. There is so much excess construction equipment parked in fields. I know – own 2 excavators.

        If you can get the Government out of infrastructure projects – then, everything could be completed in a cost-effective manner – I am probably dreaming.

        But, everyone should have to pay for these improvements with road taxes and increased tolls. Question: Why are most Interstate highways still toll free.

  11. Lee
    November 11, 2016 at 5:49 pm

    Well let’s see…………

    The Australian 10 year government bond is up 32 bp to 2.56% in the past month.

    The A$ is basically unchanged against the US$ over that time period.

    At near the top of the 52 week range though.

    The Japanese 10 year bond is up a whopping 2 bp over the pat month to -0.04% and the yen has fallen from around 103 to 106 per US$.

    Near the top of its range as well……..

    Well not much going on there folks………..

    • Jerry
      November 11, 2016 at 6:36 pm

      Things are insane in Oz. Property prices are mental and all of the banks are on the hook. The same is true in New Zealand, when you have to pay the same money for a house in Auckland than you have to in Putney you know something is wrong. There are lots of 50 to 80k £ jobs in and around in Putney but not in Auckland.

      There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

      ‘Emergencies’ have always been the pretext on which the safeguards of individual liberty have been eroded.

      A claim for equality of material position can be met only by a government with totalitarian powers.

      If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion.

      • Lee
        November 11, 2016 at 10:36 pm

        Jerry:

        No, only in certain areas are prices insane.

        (Sydney is nuts, but that is Sydney)

        Lot’s of reasonable priced houses around. Just depends on how far you want to travel.

        I for one would never pay those crazy prices properties are getting in certain areas of Melbourne, but those areas have always been costly.

        A$2 or $3 million for a house? No thanks. I could live a very nice life on that kind of cash!!!

        Wolf,

        Don’t own them. Don’t want them. Don’t care. Buy a NIRP bond and you deserve to lose money.

    • November 11, 2016 at 6:37 pm

      Oh, the German 10-year yield is up 50 basis points and has turned positive. The price of the 30-year German bund is down about 11% since July. The Italian 10-year yield has soared nearly 100 basis points to over 2% in NIRP-land… so yeah, not much going on unless you own these things.

      • jerry
        November 11, 2016 at 6:56 pm

        This is easy…

        The market is betting that the Euro will fail now. Trump wants the EU to pay for its own security, UK is going to pull out of the EU… a major contributor, so their budgets are messed up. The “West” is broke. Everyone now are positioning themselves for a Euro failure, so they pile into German bonds knowing they will get paid out in DM.

        The Euro is so over. These guy will sell their own mother to try and stay in the game but its over.

        Socialism is over, its finished. It only happened in our life time because of the baby boom, they didn’t realise that a Ponzi scheme needs new feeders all the time from the bottom. I come from a family of 9 and families today only have two…. do the math.

        Have you noticed how

      • Tom Kauser
        November 12, 2016 at 1:51 am

        Unless the fed turns political?

  12. Jerry
    November 11, 2016 at 6:08 pm

    These guys are insane.

    We had a debt issue back in 2008 and today we are 50-60 trillion more in debt. Back in 2008 all they did was transfer private debt to the public sector. Government transferred private debt on to their balance sheet which installed false security into the markets. The debt is too much and the government will begin to turn against their own people.

    Your government will look at its citizens like a natural resource, like a coal mine, an oil well and they will treat you like a beast of burden.

    The USA and its decline is very similar to the Roman Empire. A standing army that is expensive and politicians having spent the money like to get value so keep them busy.

    I hope that Donald Trump has read Ayn Rand.

    • 2banana
      November 11, 2016 at 10:42 pm

      Federal Budget:

      Entitlements: 60%+
      Defense: 16%
      Payment on Debt: 6%

      • Tom Kauser
        November 12, 2016 at 1:54 am

        Quarterly defense appropriation supplementry budgets!

      • Dan Romig
        November 12, 2016 at 8:37 am

        Cost to carry national debt is largely linked to short term Treasury Yield. The 1 year closed at 0.72% on Thursday 10 November; up from 0.62% on 4 November. But, on 29 January 2007, the 1 year was 5.12%.

        If we get back to 5% on the 20T debt, that’s 1 trillion per year. US 2016 budget was $4T. How about a 25% Payment on Debt instead of 6%?

        I bet that we will dip back a bit on Treasury Yield yesterday (Friday 11 November) by buying some TLO, but it slipped a bit lower before market close. I will keep a close watch on it.

        Since I frequently drive over the 35W bridge that collapsed into the Mississippi river nearly ten years ago, I advocate for the maintenance of our roads, bridges and railways! Minnesota had a bonding bill set to go in our state’s legislature last spring that would have put $300M per year, for ten years, into our roads. The cost to borrow was low, and the investment was needed, but the GOP blocked it; partly to smite Governor Dayton who is a Democrat. Republicans now control both the House and Senate in my state.

        • Greatful again
          November 12, 2016 at 9:55 am

          I think I saw that last years interest payments were in the ~$500B range. Or about half of what was borrowed that year. Or 16% of the total budget.

    • Tom Kauser
      November 12, 2016 at 1:52 am

      I hope Donald trump chops hank Paulsons neck from his shoulders

  13. william
    November 11, 2016 at 7:05 pm

    Mortgage rates are linked to 10-yrs… mortgage rates spiked the last 7 days, highest in 8-9 months. This could hasten a softening real estate market at a time when rents are drifting down (at least here in Central Texas).

  14. OutLookingIn
    November 11, 2016 at 8:15 pm

    Make War on Cash.

    The Indian government has banned the use of the 500 and 1000 rupee currency notes. These two cash denominations compose the vast majority of the Indian cash economy.
    As a result the Indian physical gold market, has skyrocketed to a little over $2,200.00 USD per ounce of gold! If you can find any for sale!

    A goodly portion of the bond bubble liquidations, will find its way into physical gold and silver. The manipulators realize this, that’s why $10 billion of paper gold futures were dumped onto the market floor this morning, forcing down the price of gold.

    Pay no attention to the “paper” price of gold. The reality based price is much higher. Just ask the Indian’s!

    • Chicken
      November 11, 2016 at 9:21 pm

      Long gold in Rupees? Further, I heard two accounts, one is the large bills are worth nothing and the other is you must deposit them in trade for smaller bills. Not sure which is true but hopefully the latter.

      I have no idea what gold is worth, considering central governments have long removed the most important reference of pricing, they’ve controlled markets with an iron hand now 8 years all during the democrats watch nothing was done to correct the situation aside from signing us all up for more of the same debt, which doubled.

      Trump reported there were some not so good things to be concerned with but couldn’t elaborate, I’m waiting for his report.

      • d
        November 12, 2016 at 6:54 am

        “Long gold in Rupees? Further, I heard two accounts, one is the large bills are worth nothing and the other is you must deposit them in trade for smaller bills. Not sure which is true but hopefully the latter.”

        You can deposit, youc can get a limited number of new bill sper week.

        Its a shake down. They are hoping around $45 Billion in old money, never turns up. They have even budget it.

        The weapon to ensure this, is a 200% tax penalty, paid now, on any cash, they consider untaxed. Indian tax collectors make the chinese and Russians look good, once they get their hooks into you.

        Family’s are opening bank accounts at every bank for every family member to deposit their cash. 75 M $ of gold was forward sold at a 65% premium on the first night of the cash lockup, when some gold dealers stayed open all night. On the second night modi instructed them to close by their normal end of business.

        The west will be watching with interest, this modi experiment in government extortion.

        I have seen such coming for years, which is why I have silver, other metals and things, and still to much cash.

        I live in a country that has a rolling change of bank notes, almost unannounced now.

        The announcement that as of X, notes of Y type, can only be exchanged at bank 1. with ID will not surprise me.

  15. R cohn
    November 11, 2016 at 9:39 pm

    There were three factors in the bond rout
    1.Rates were at all time lows this July;they were not far from these lows just before the election
    2.Inflation expectations were already starting to rise.Borrowing for infrastructure projects would just raise exacerbate this trend
    3.Trade wars ,especially with China.One of China’s weapons is selling at least some of their huge horde of Treasuries.It looked like this weapon is starting to be deployed.

    Higher rates are NOT bullish for stocks
    Higher rates raise costs for companies borrowing money.Everyhting else equal that tranlates into lower earnings
    Higher rates mean lower P/E’s via using a higher discount rate
    Higher rates make it less likely that companies will buy back stock.Buying back stock has been THE major factor in stock demand for a number of years
    Higher rates make dividends less attractive
    Higher rates raise mortgage costs and lease rates for cars.This means fewer buyers of both

    Admittedly rates at %2.13 on the 10Y probably do not present a big problem for stocks..But rates above %3 do and will crash the market .

    A WORD ON GOLD
    Rising rates make it more costly to carry any physical asset,so higher rates will impact gold prices negatively.But rates are hardly the only factor in gold prices.If the perception is that inflation is moving to a higher level,then gold will get a bid not far from current prices

    • Tom Kauser
      November 12, 2016 at 2:16 am

      Gold is money when it is a funding currency especially in times such as these!

  16. Bob
    November 11, 2016 at 10:20 pm

    Heightened inflation expectations increase interest rate expectations and tank bonds, but why should stocks go up? The market must be betting the higher rates will raise the dollar, which decreases price of imports and increases profits. What they are not considering is that higher interest rates will depress the housing market, depress lending, and cause some business failures, and ultimately lead to another deep recession. No stock will do well in that environment. The upward move in stocks seems highly irrational to me.

    • Bryce
      November 12, 2016 at 1:06 am

      @Bob If the dollar moves higher, it will hurt multinational companies and Spy earnings overall. The trick will be to find companies that only have exposure to the US since Trump wants to start a trade war.

      The stock market has been running on hope and nothing more at this point. I also think higher interest rates might cause a lot of housing markets to top since incomes won’t keep pace with rising rates. We have a housing affordability bubble already, and higher interest rates will only add to the burden. If Trump lowers corporate taxes to 15%, that will also provide a tailwind to stocks.

      In my opinion, the real winners in this environment will be financials due to higher interest rates. Insurance stocks interest me due to this, and most are still trading well below book value.

    • Tom Kauser
      November 12, 2016 at 2:19 am

      Someone pulled the fire alarm during midterms!

    • r cohn
      November 12, 2016 at 10:12 am

      The bullish argument for stocks is simple
      First. Lower tax rates for corporations mean more after tax income for corporations
      Second .Fewer regulations mean more profits
      Third More infrastructure spending means more business for construction and related companies.This will cause incomes to rise for those affected.Their spending will in turn affect the rest of the economy.
      But this comes at a cost of greater deficits and higher interest costs.

  17. JL
    November 12, 2016 at 1:20 am

    I have a question that is probably very basic sounding to many of you, but this seems like a great place to ask it. Many of you have very interesting opinions and feedback.

    What will happen if raises don’t rise? With all of the negative-sounding consequences from raising them, what motivation is there for the Fed to do so? I know savers and retirees are taking a hit, but at this point, they are clearly seen as collateral damage (unfortunately).

    • Tom Kauser
      November 12, 2016 at 2:06 am

      The fed is multiple rate hikes behind and the appearance of it becoming political is acute?
      The fed is really in a corner. The market senses that the fed can’t raise rates in December or expand bond purchases (QE) without alarming the new president?
      The Chinese fear that trump will close the dollar window like nixon did the gold window?
      Wholesale liquidations of treasuries continued Friday morning while the bond market was closed. EM central banks sold dollars to weaken the peg and commodities struggled to hold on to recent gains?
      With the election results impairing further action from the fed
      Treasuries are free to find their own comfortable pricing?

    • d
      November 12, 2016 at 7:02 am

      Among other things if they dont raise rates they will totally loose control of inflation which will go Hyper so fast in this environment, its not funny.

      Think Argentina where they announced the price increase over loud speakers, in the supermarket, continuously, every day, for months.

      As the staff could not keep up with the relabeling.

    • r cohn
      November 12, 2016 at 9:49 am

      Rates have ALREADY risen.
      LIBOR along with EURIBOR are the most important benchmark rates in determining short term interest rates .If you have an adjustable rate mortagage,it is probable that your interest rate is based upon LIBOR.
      So in a very real sense,the FED is behind the curve.
      The debacle this week in Treasuries involved longer term bonds.These longer term notes are more sensitive to inflation expectationsand the TIPS market
      http://online.wsj.com/mdc/public/page/2_3020-libor-20161111.html?mod=mdc_pastcalendar

  18. Julian the Apostate
    November 12, 2016 at 2:38 am

    Some states are better at infrastructure than others. The states that were in total disrepair when I started trucking in ’81 ( LA, AR, PA, IL, KY etc.) have gotten better over time. Some states that had good roads have gone to pot or not kept up. IN has a balanced budget but the roads are going to pot, CA has a wildly out of control budget, and their roads are also crumbling. KY, GA, TX, and OH are adding lanes and streamlining the flow of traffic. I-40 needs upgrading desperately along most of its route. Some states are just static and never seem to change. Water and sewer systems everywhere are just coasting. Obama promised to improve infrastructure then spent the money on his cronies. If Trump can impose some real world discipline onto this project it’ll last 50 years. The whole Federal system is sorely in need of this type of discipline. If nothing else this election shined a spotlight on all the cockroaches in both parties, and brother did they scatter. It reminds me of a fare I picked up when I was a cab driver in the 70’s, a blind woman who asked me to come in and carry her bags to the car. The cockroaches infested the place but they did not scurry away: she couldn’t see them and they had become brazen, just like the current crop of elites. They’re called Shadow Government for good reason. Parasites need the dark.

    • Tom Kauser
      November 12, 2016 at 11:59 am

      concrete boots is da infrastructure Donald likes to spend lavishly on!

    • nick kelly
      November 14, 2016 at 2:08 am

      I thought going to pot was supposed to help Colorado’s roads.

      Seriously- here on Vancouver Island the roads are excellent. Don’t know why but having seen some of Econcat88’s video of Toledo’s roads- all I can say is that folks here would go nuts if pot holes like that went unrepaired for more than a day.
      One thing, a deep freeze is very unusual here.

      May I add a word for our two- wheel friends ( I was one in my younger days)- a big pot hole is more than an inconvenience for a motorcycle.

  19. VK
    November 12, 2016 at 4:25 am

    Trump did in 4 days what the FED has been trying for 8 years – raising inflation expectations. The Donald is an expert in debt restructuring and in construction, his recent $200 Mn hotel was delivered on budget and ahead of schedule in DC, I believe he has already said that he will print money to cover his infrastructure spree. Janet Yellen has been informed that she will not be carried forward beyond her term expiration in 2018 – the FED will comply or be made to comply. As for interest rate rises on US debt, the Donald has said that US treasury will buy back the bonds at a discounted price from the holders as rates rise, again via FED money creation. What needs to be done, will be done.

    • nick kelly
      November 14, 2016 at 2:40 am

      A central bank at the beck and call of politicos has usually been a recipe for disaster. That’s why when Trump takes the oath of office he will pledge to maintain the independence of the Fed. This is not in the Constitution, however, but I believe in Germany it is. A politician is not even supposed to contact the Bundesbank, except via certain format.
      I don’t know how it works in the US, but if member of the government in Canada phones a judge he often has to resign.

      I think it is naive to think that Trump has any magic formula- printing a whole bunch of money has been tried many times by many regimes.
      How will the US fund its debt once it becomes clear that the Fed is going to turn its bonds into vehicles of wealth destruction?

      There is another Black Swan lurking out there. It is looking like the euro may be doomed. Why a basket case like Italy thinks it would be better off
      alone with the lira, paying maybe 7 or 8 or 9 % to roll over its debt, who knows but apparently some do.
      But if the euro does fail, apart from possibly ANOTHER civil war in Spain and Greece, Germany will presumably go back to the D-Mark.
      This would instantly make the $US a second- tier currency ( see independence of Bundesbank)
      The double- digit US interest rates of the 1980’s were partly caused by investors preferring the D- Mark and Swiss Franc as stores of value.
      We still have the Swiss Franc and Swiss industry suffers because it is the hardest currency out there- but its economy and the float is too small to be a US$ competitor.

      • d
        November 14, 2016 at 3:45 am

        “Why a basket case like Italy thinks it would be better off
        alone with the lira, paying maybe 7 or 8 or 9 % to roll over its debt, who knows but apparently some do.”

        Because then they can bail out their bank’s, and temporarily reinvigorate their economy’s, by regular devaluation, again, like they, and all the other club-med states used to.

        The eventual implosion of some Italian banks, is a global financial threat, unless very carefully managed..

        The geek Government, with its loony finance minister, wanted out of the Euro. For the same reason

        The greek people voted to stay in, as they knew, if they left Eur the communists would devalue and devalue, until they could import nothing, like it was before they entered it.

  20. matt
    November 12, 2016 at 7:10 am

    Wolf, correct me if am wrong here. we have cole and Co shutting down its retail end. . Best Buy , Target. Walmart is shutting down more stores. Oh that’s right nobody is paying attention to this? never mind. I never said that did I? Yea, very quietly is several states. The auto industry s bin hit with massive lay offs from the supply end as that end has had thousands laid off and some even gone bankrupt and now GM has laid off 2,000 perm come January. Sears most likely gone by beginning of next year. earnings have been crap across the board. beats have been cooked and we all know it. So if inflation is so called “to pick up”? the why are so many retailers crashing into oblivion with layoffs increasing and spending crashing? these annalist et paid big bucks to be wrong most of the time. take the first 4 letters and that is basically what they are. they talk out of there behinds. I may not have a college degree but I do believe common sense when looking at the entire big picture can tell you what is ahead and it does not look good at all. this is why I love your articles. it involves the entire picture

  21. Julian the Apostate
    November 12, 2016 at 8:21 am

    You’re dead on, Matt. Once Obama is out of office there will still be a price to pay for his party, a time lag that of course will be blamed on President Trump. Meanwhile the thugs on Soros’ payroll will be creating chaos with his Purple Revolution. Interesting that the Clintons both surfaced wearing Purple. Not only is purple a blending of red and blue, it was the color of the Roman Emperor. When someone was being installed as emperor this was called ‘assuming the purple’. The dye used in the color was expensive and rare. It was made from the blood of a shellfish that lived deep in the sea, and a highly trained diver was required to obtain it. The divers were called purplefishers.

    • Chicken
      November 12, 2016 at 9:00 pm

      Listen, this is gonna be one hell of a bowel movement. If we don’t get rid of the worms now, they’ll burrow so deep into the bowel that not even Hercules’ famous Haitian jerk prunes could dislodge them!

  22. michael engel
    November 12, 2016 at 9:14 am

    – Long term chart $tnx(monthly) – 10y yield – is a wedge, trending
    down, soon to pop up.
    – Today, we reached the upper resistance line.
    – Will this move stop now, or do few zigzags, on the way up ?
    – The problem, globally, is that we all need ($)’s, hungry for ($).
    – Many crony / major businesses and foreign governments used
    a WHOLESALE, credit card debt with a much cheaper % rates thanthe local % rate.
    -They used a pipeline network of credit card debt called
    $Eurodollar future.
    _Those pipelines recently, since 2008 and again 2011, suffered
    corrosion, some big holes.
    – China, Brazil, Mexico, Egypt and many more are victims.
    – To finance debt they devalue their currencies, dump $UST
    reserves, gold – if they have.
    – The US is not in a better shape. Trillions of new debt to finance
    older obligations, not new ones.
    – Higher % rates will kill housing and RE is banks biggest assets.
    – President Trump will not be able to deliver much.
    – But he is an expert of buying debt @ 0.25/1.00 $
    – His fate maybe worse than NIXON !!!

  23. NY Geezer
    November 12, 2016 at 9:25 am

    On election eve, in the early hours after it became clear Trump would be President elect, the 10 year Treas. yield plunged from over 1.9 to about 1.72, and US stock futures were selling off so hard that circuit breakers were employed to stop the fall. By morning the everything changed. The yield had recovered to over 1.9 and continued to rally. Moreover, US stocks were in full rally mode.

    The professional betting crowd (Hedge funds, Wall Street houses, etc.,) had positioned themselves before the US markets opened on the Wednesday after the election. The non-professional public was mostly unable to buy the dip on that Wednesday morning. Instead they piled in and created out sized profits for these professionals.

    The question in my mind is what happens when the professionals take their profits as they always do. Will the market retain some of the gains or will it quickly resume the earlier post election crash action?

  24. Maximus Minimus
    November 12, 2016 at 5:52 pm

    I think, when Trump talks about rebuilding the military and reduce spending, what he means is withdrawal or reduced presence from many places where the military is bleeding the American taxpayer’s money.
    There are a dozen or so places that come to mind, that are useful if you want to bully some small country, but otherwise a total waste.
    War is expensive, and the US has been at it for a long time, now. Time to rebuild the crumbling house.

    • Junior_kai
      November 16, 2016 at 2:27 am

      Hope you are right and we pull back from a lot of countries. Who knew until last week the CIA had special forces (some who were killed) in Jordan? We have a base in Ecuador, oddly enough they tie their currency to the USD. And we run drug interdictions from that base supposedly.

  25. Kreditanstalt
    November 13, 2016 at 7:14 pm

    Then would I be correct in assuming that both the perma-optimistic panic-buying stock bulls and those busy selling bonds with both hands would be terrified of stagflation…?

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