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Thread: weekend commentary - 'conspiracy theory' re US gov't bond rollovers and Dow -1000

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    Banned Melonie's Avatar
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    Default weekend commentary - 'conspiracy theory' re US gov't bond rollovers and Dow -1000

    (snip)"A few days ago we reported, quite stunned, that the US Treasury had redeemed nearly $600 billion in Bills in the month of April. Alas, the side-effects of an massively short-maturity heavy bond curve will be here to haunts us for a long time: according to today's DTS, in the first 4 business days of May alone, the UST has redeemed $144 billion in Bills. Annualized this number is surely something that even Richard Feynman would not joke about. We have gotten to the point where the roll issue is not a monthly concern, but is becoming a weekly funding threat, and even daily.

    Of course, as we speculated in December, what better way to raise demand for Treasuries than to stage an equity selloff. Well, we got our selloff, and the 10 Year was trading in the lower 3% range today. However, the risk now is how the sovereign fire will spread through the periphery and into the core. Already, we are seeing that CDS traders are massively betting on a collapse of the UK as the next bastion of sovereign spending lunacy. And when the UK goes, Germany is next, shortly to be followed by Japan and the US. At that point the only buyer of US debt will be the US itself.

    Which will lead to the final outcome of massive consumer deflation as economic collapse finally strikes home, coupled with asset price hyperinflation, as a gallon of [gasoline] hits $10 (and helping the Dow hit 36,000). And as this is not an equilibrium state, the outcome will be, as it always is in these situations, war. Hopefully the US is good as it historically has been at finding its "deserving" opponent, WMDs aside. Otherwise, things may be a little rough for the great declining American civilization after the next 5 years. "(snip)

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    The point the author is discussing is the fact that the US gov't is now running such a deep imbalance of gov't spending levels versus tax revenues that it now needs to sell off / roll over unprecedented amounts of US gov't bonds in order to raise sufficient cash to keep those gov't checks flowing. But when the 'supply' of anything is increased dramatically while the number of willing buyers remains the same ( or decreases ), the 'price' tends to drop. Or in the case of bonds, the interest rate increases as the 'price' drops.

    Higher interest rates on US gov't bonds is something that the US gov't cannot afford to pay. Therefore the 'conspiracy theorists' are speculating that last week's US stock market 'scare' was in fact an orchestrated attempt to push US stock market investors towards selling their stock shares in favor of purchasing more US gov't bonds !!!

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    Default Re: weekend commentary - 'conspiracy theory' re US gov't bond rollovers and Dow -1000

    i thought government bonds were a good investment? or is that municipal bonds? i am such a slow learner with this finance talk. which is the one with the 6% tax free interest thing?

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    Default Re: weekend commentary - 'conspiracy theory' re US gov't bond rollovers and Dow -1000

    Quote Originally Posted by camille27 View Post
    i thought government bonds were a good investment? or is that municipal bonds? i am such a slow learner with this finance talk. which is the one with the 6% tax free interest thing?
    That depends on how you define good. Generally, US Treasuries are the safest government bonds anyone can invest in. What happens when investors get nervous, they flee to quality, for example, USTs. We saw that all last week with nervous investors buying UST 10 year notes and driving the yields down all week. From USTs you move upward in risk and reward.

    A municipal bond is only as sound as the municipality. There are two different kinds of municipal bonds, GO bonds and revenue bonds. GO bonds are general obligation bonds. That means the municipality is on the hook to pay the bond no matter how well the bond financed project turns out. Revenue bonds are paid from the stated source of revenue.

    Here is an example: Indianapolis International Airport Authority Parking Garage Bonds, they pay a stated rate of interest and that all comes from parking revenues at the airport's garage. Those have proven to be very stable secure bonds over the years. (Apparently lots of Hoosiers are willing to pay $12.00 a day to park their cars at the airport. Who knew they were so profligate?) Another example is Orange County California General Obligation bonds intended to finance a multitude of projects around the fast growing suburb of L.A. Unfortunately, Orange County went bankrupt a few years ago and bond holders took a severe haircut. (Who knew ultra-conservative Republicans were such spend thrifts?)The point is with muni bonds, you need to look very carefully at what is being financed, what the revenue sources are, how the municipality handles its money and don't take the rating agencies word for it.

    HTH
    Z

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    Default Re: weekend commentary - 'conspiracy theory' re US gov't bond rollovers and Dow -1000

    i see. thank you for such an accessible breakdown.

    also, $12 a day for airport parking is a fucking amazing deal. i can see why the return on the investment was so good.

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