Is it possible every bond bull gets wiped out first?>
It's real important to make distinctions about what a "bond" or debt instrument is. I think in general "bond bulls" are going to get routed. I would only put a small segment in the "safe" class, Treasury bills, and possibly 2 year notes (*), and similar maturities in certain foreign government securities (which? should be discussed). Everything else is bloated and off limits to my eyes. It will be a combination of a boiling over impact from inflation, AND credit revulsion AND initially crowding out (amplified by lackluster FCB participation now being seen).
idorfman.com
That's a lethal combination.
There will be no bull trade in the longer Treasury dates, and certainly not other paper, because rates are going to blow out even higher relative to shorter dates. In otherwords the yield curve is going widened but at higher rates especially 3 years on out.
As we've long discussed, I also agree that housing Bubble fallout will be the catalyst "for something". But I just don't see the outcome as a big bond rally, and more cheap rates for consumers to continue borrowing. There is a "credit event" out there, and the outcome will be revulsion away from most bond classes except maybe those I mentioned. And on those if rates go higher, they just get rolled over. But nobody is going to get rich, and clean up on a trade even on those, they will just be a refuge. Those sitting complacently in broker or bank money markets full of MBS, ABS and CP will be facing "surprise" losses.
idorfman.com
idorfman.com
Since 4 week and 3 month T-Bills through Treasury Direct pay even more than anything intermediaries offer, that's just sheer neglect and laziness to allow that to transpire. So I'm really preaching Treasury Direct.
treasurydirect.gov
So here's the sequence:
1. Crowding out (happening now): private and government debt demands in the US are still running too hot. There is too much existing debt, too much new debt being issued (including way to much robbing Peter to pay Paul),
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and servicing expenses are increasing. The great enablers, FCBs and GSE's are overstuffed already. They are still playing in a half assed way, but not nearly at the level to provide enough heroin to the Leviathan.
2. The debt markets need to move to equilibrium (or rationing), somebody (consumers and speculators)has to cut back, or it needs to be aggressively monetized. I'm agnostic on which, I just watch. As long as the Fed acts somewhat responsibly, I am content to hold Treasury bills (4 weeks to 26 weeks), hedged somewhat by long JY and SF futures.
Here's what I sense today, and I've been posting updates constantly. Since the government is actually increasing borrowing, and right now the Fed and FCBs are only half assed monetizing it, the consumer is the one forced to pull back in some areas. But the housing Bubble still allows some (who I call Lucky Lotto winners) to sell/refi or engage in windfalls. Even though housing prices are rolling over, those who sell (or refi) get a windfall, and that keeps debt levels rising in the overall economy. And as long as that happens, crowding out continues, and pressure on rates also continues.
3. There is an inflection point at which this windfall activity stalls. We may be getting to that point. On the Ben Jones site,
thehousingbubble2.blogspot.com
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one reads more and more of an impasse between buyers and sellers. The key is activity as much as price reductions. I consider a seller reducing his price 7% (from the peak) and successfully closing still a windfall, and that transaction expands credit. What we really need to see are transactions seizing up, with fewer transactions (say, 600 on the overall MBAA index (647 last week), and 400 on the purchase index?).
idorfman.com
That would be extremely bearish and would result in a waterfall effect. Look for it in the MBAA indexes and the non M1 component of M2 data.
4. What happens next is key. The economy quickly craps, and we get a credit revulsion, caused by debt servicing problems on housing. The initial reaction would be a flight to safety. I do think short dated Treasuries (and gold, once speculators are cleared out) would be in demand in this phase, but about everything else gets sold. Does the Fed aggressively monetize? The appointment of Helicopter Ben seems to suggest so? If that were to happen, I think the credit revulsion gets checked by artificial demand from Wizards, but how would the FCBs and other foreigners react? They might amplify an inflation panic. Right now I think they are "concerned" about inflation, hence the buyer's strike, if Ben shows his true colors, I think they will panic.
We will have to check the overall landscape at that point, but bonds generally will be under immense pressure. If, and this is important, at any point the Fed restrains it's monetization, then the highest credit bonds might set up as a buy. We are far from that today however, so to be continued.
(*) In my mind's modeling of this, I would use 2 years and possibly 3 years as "pivot points", if I saw credit demand slowing to around 600 on the MBAA purchase and refi index, and the non M1 component of M2 going flat (**), then I would start using them at the auctions. Additionally I would have to see the Fed keep it's SOMA account well under 7% (last quarter annualized), not expanding more than that. That would eventually fight inflation, but anything over would just accelerate it.
(**) non M1 component of M2 loks tired, but still has a little umph, we will see how the last several weeks slowdown in purchase activity impacts this.
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