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The Great Bond Market Crash of 2010

By Mad Hedge Fund Trader | Mon, 30 August 2010 01:56 | 0

OK, maybe it hasn't really crashed yet. But the two day, 3 ½ point sell off in the futures for the 30 year Treasury bond (TBT), at the end of last week was the sharpest drop in 18 months. Winston Churchill's great 1942 quote, which marked the turning of the tide for Britain in WWII, comes to mind. "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

In my recent piece on the extreme overvaluation of government debt, I pointed out that the last time rates were this low, Treasury bonds brought in a miserly 1.9% yield for a decade. Professor Jeremy Siegel at the Wharton School at the University of Pennsylvania has one upped me. After yields bottomed in 1956, bonds suffered negative returns for 30 years!

This should have occurred to me, as the first mortgage I took out on a Manhattan coop in 1982 carried an 18% interest rate. That was then Federal Reserve governor Paul Volker was waging a holy war on inflation and eventually won. I took out one of the first ever floating rate mortgages, and by the time I sold it three years later, the rate had melted down to only 11%. I tell this story to kids buying their first starter homes now and they look at me like I'm some kind of dinosaur.

 I have always believed that markets will do whatever they have to do to screw the most people. A big part of the parabolic move in bond prices was caused by so many investors going into this the wrong way. Hedge funds were short Treasuries and long steepeners, while mutual and pension funds were underweight.

Remember, this was supposed to be the trade of the year? Of the decade? Only individuals and momentum players have been in there buying with both hands, not because they love low yielding bonds so much, but because they hate equities. All it took to set the cat among the pigeons was for Q2 GDP to come in at 1.6%, not as bad as expected, and for Ben Bernanke to remain silent about any plans to flood the markets with more liquidity.

This may not be the top in the bond market, but it is starting to resemble what tops look like. One more equity puke out in September could easily get us there.

Courtesy: Mad hedge Fund Trader

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