The global bond market swoon wiped out $1.2 trillion in value since April. Bonds with long maturities suffered the most. The 10-year Treasury Note Price Index lost 3.2%. The 30-year yield, at 3.1% currently, is still very low, but it’s the highest since October 2014. And the 30-year Treasury Bond Price Index has dropped 9%.
“After all, the potential for losses is now greater than at any time on record, based on duration levels for $50 trillion of debt tracked by Barclays Plc.,” Bloomberg reported.
There are numerous reasons for this scenario – a very benign scenario where the greatest credit bubble in history winds down gradually, in small steps with many ups and downs that give the “smart money” time to reposition, rather than suddenly and all at once.
And today we learned of another reason.
Over the last few years, any illusions we might have nurtured that our financial markets are fair have been destroyed piece by piece by a relentless and consistent series of scandals: Libor rates, precious metals, stocks, commodities, foreign currencies…. They were all caught up in massive manipulation schemes.
A few small-fry traders were pinpointed and banks agreed to multi-billion-dollar settlements as part of the cost of doing business, denting a quarter’s worth of GAAP earnings, though “adjusted” ex-bad-items earnings remained gloriously untouched. Share prices often rallied when the settlements were announced. And CEOs went scot-free.
OK, maybe not all CEOs. Scandal-infested Deutsche Bank finally dumped its co-CEOs over the weekend.
But there was one market that folks thought was somehow above this endless sea of manipulation, and so they have confidently placed their bets, including foreign governments, thinking – nay, deluding themselves into thinking – that this market was one of the last ones to be fair: the US Treasury market.
It’s the most liquid bond market in the world. It’s huge, thanks to the debt the US government has piled up over the years: of the $18.2 trillion in outstanding Treasury debt, $5.1 trillion is held by other US government agencies, and $13.1 trillion is “held by the public.” In 2014, the Treasury Department rolled over old debt and issued new debt totaling about $7 trillion.
The Treasury takes two kinds of bids for these debt sales: non-competitive bids; and competitive bids. The latter are submitted by the New York Fed’s 22 “primary dealers” – the largest banks and broker-dealers in the US – in secret ballots, most of which are never made public.
So how tempting would it be to manipulate this monster market? Very, apparently.
Turns out, the Department of Justice smells a rat in this until now pristine Treasury market, according to the New York Post:
Justice lawyers, believed to be in the early stages of a probe, have reached out in recent months to at least three of the 22 banks that act as primary government debt dealers and requested information regarding auctions of Treasury debt, said one person close to one of the banks that received the request.
No single bank has become the focus of the probe, it is believed, and no bank has been accused of any wrongdoing. In addition, there is no guarantee that the requests for information will turn up any evidence of manipulating Treasury auctions.
A spokesman for the DOJ on Sunday declined comment on the matter.
So details remain murky. If we ever find out who manipulated what, and at which stage of the process, it will be a while, and it will be years before the by now habitual settlements, if any, are announced, and the resounding noise of wrists getting slapped reverberates through the financial markets.
But here is the thing: If manipulation had the effect of raising the price of Treasuries, and thus lowering the yield even by a little each time, investors, pension funds, and everyone else out there looking for a “safe” investment would have overpaid. The amounts might have been small, but over the years, given the sheer dollar volume involved, if would have made some bankers very, very rich.
And now that the probe by the DOJ has started some time ago, we can assume that a finely-honed flurry of activity has broken out at these banks, where lawyers are unleashed, protective walls are erected, categorical denials are carefully drafted and reviewed for the umpteenth time, and things are said (rather than put in emails) that in effect would stop the manipulation in its tracks.
In the process, Treasury prices, left to the vagaries of the markets, which have already been spooked by the Fed’s interest-rate cacophony and other factors, are beginning to swoon from their manipulated perch.
As usual, we might only learn the answer to the manipulation scheme years after it stopped mattering, but we know one thing for sure: Treasuries have lost their oomph. And some folks are beginning to lose some real money. Read… It Scares “the Hell Out Of” Bill Gross, Yet in Last-Ditch Effort, Companies Sell More Bonds than Ever
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I have long argued that the wide range of manipulation that is openly allowed in the market place, from HFT to rigged fixes, is the new price controls TPTB need to keep the charade going.
One by one, the markets will arrive at prices that do not allow the economic activity backing those prices to properly function and it all goes to hell. Does NIRP fit that bill? Oil? Housing?
Kick the can … tick tock …
I think that time is now.
I concur. Nobody seems to notice that central banks have stopped making comments like “whatever it takes” and have been telling us we’re on our own now.
They WILL let it collapse folks. That’s the plan, creative destruction, order through chaos, blah blah.
The time for destruction and chaos has been delayed longer than ever, so everyone is incredibly complacent, which will make this hurt all the more.
The should have let Bear Stearns fail and all of this could have been avoided. They were afraid of the hole in Bear Stearns and now they have one that can never be filled.
Call me cynical, but I think they were just on the wrong side of the trade in ’08 because they legitimately didn’t see it coming due primarily to greed and arrogance.
I recall at the time everyone I knew was PISSED about TARP, many people I know who weren’t really politically active were all over their elected officials to not support it, and NPR even reporting (and retracted quite quickly) that staffers were saying it was 99:1 against. But congress wrote a big blank check and the bailouts ensued.
This time, they have had a chance to reposition, etc and capitalize on the collapse. With low interest rates for so long, imagine all the pension funds (!gulp!) and so forth that are larded up with really crappy bonds and what not … that were sold to them by someone else. ZIRP has forced anyone in the investment business to hold their nose and buy anyway because they can’t do their job (regulatory, fiduciary, etc) by recommending cash. The system is designed to funnel money in one direction, like a cattle chute to a slaughter house.
Makes one wonder what the guys who bought that time have done with that time………..
The endgame does seem to be playing out. My kids think I’m nuts. Well I’d rather they think me nuts than be right. I hope when I’m dead they can laugh at the crazy old man rather than be kicking themselves in the butt for not believing I could have known.
You are not alone. Its not different this time.
Another confirmation about bond market volatility from Nouriel Roubini who predicted the last stock market crash. He is sort of an economist/ party boy who mingles with wall street types and my guess gets some direct feed from the “other side.”
The move toward reality is likely to be painful. Some fancy figure skating has been going on for a long time on some very thin ice. The level of corruption in all things financial at all levels has been mind bending. It is as if the corrupt have been overtly trying to out do all other historical peaks of corruption. I don’t know if I have any outrage left. I fear my outrage reserves have been over produced and I am now pumping a dry outrage well. I would not even bat an eye, if tomorrow I saw a guy caught carrying stolen gold bars out of a brokerage firm and a DOJ lawyer helping him with the door. Color me cynical.
Crazy Coot….”Call me cynical, but I think they were just on the wrong side of the trade in ’08 because they legitimately didn’t see it coming due primarily to greed and arrogance”
In this I would disagree. People have forgotten that early in that year (around April) Ron Paul made a statement that ‘something big is going to happen later this year’ but did not specify what that ‘something’ was. And then…in late August (I believe) we had our third (in the history of the U.S.) closed door session of Congress. That session lasted a very short time. It told me they weren’t ‘discussing’ anything. They were just being told.