Bernanke had spent June by draining the outstanding credit of Federal Reserve (check WSE for details). Maybe it was to punish hedge funds for oil speculation, maybe to scare investors from stocks to bond. The economy is suffocating from very expensive credit. By moving the yield on “risk-free” (explanation later) credit down the Feds are forcing investors to take some risk and unzip some pockets.
But something unforeseen happened today.
From Accrued Interest:
This is the first time in my career that I truly believe U.S. Treasury bonds sold off on credit concern. By this I mean, the credit of the U.S. Government. Long time readers know I’m not an alarmist type, and I’m sure not saying the United States is going belly up, but credit default swaps on the United States of America moved 11bps wider today (from 9bps to 20bps). The 10-year Treasury moved 15bps higher. All on a day when people are scared shitless and there should have been strong demand for “risk-free” assets.
Draw your own conclusions. I’ve drawn mine.
Maybe it was a historic day. Today the market started to price Treasuries below AAA, I don’t know if it ever happened before. The chart (click to zoom):
Treasuries moved below neckline (thin red line) in mid-May. Then Ben started to drain hard and the market got the message, it was orderly scared into bonds. Bonds made quite an impressive reversal and almost kissed the neckline from below. And then the market got scared out of bonds. I don’t think it was a coincidence that oil was up today. I think some people just don’t know where to put money.
Just for reference, the average yield of high-yield bonds is above 12% again:
In general, the spread between rates for different credit rating is widening. Just as one possible example see the mortgage chart:
Jumbo rates are jumping out of the window. Now, when Treasuries are not so much AAA as they used to be all the yields will move higher. As you recall my chart from Ned Davis Research:
All the yields moved higher in the previous K-Winter, in 1932, the same period we are now.
Japan experienced the same in 1992, another Kondratieff Winter sampler. The 10Y government rates moved above 8% at the very beginning of the crisis.
This is what we are starting to experience now.
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My tin foil hat theory has been that Treasuries would eventually trade below AAA. That the likes of GS and JPM would become the worlds benchmark securities.
I don’t quite believe myself that it can really happen on a sustained basis but it’s more like my theory of what the ultimate pigman wet dream is.
For now the crummy assets and their liabilities taken in exchange for cash by the the Fed and the Treasury in things like the Bear Sterns raid are pretty small potatoes in the big scheme of things. Still that event and it’s $29 billion price tag suggests a model which has to have others drooling. The fly in the ointment being Sam can hardly afford to do many such deals right now, or at least provide the cash right now.
On the plus side the Treasury and many and varied arms of the Federal Government are directly in the hands those whose life has been to serve private interests; with Hank Paulson’s name heading the list.
It is a lynchpin of modern conservative theory that it is impossible to identify the public or common interest. Michael Powell, Colin’s son and former FCC commissioner, said that directly while serving as chairman on matters not related to finance directly but the point was made.
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