U.S Bond Auctions – Part 2

Ok…let’s get back down to the auction hall for a minute, and quickly envision we are in attendance at an auction where everybody and their dog wants the bonds that are for sale. I’m picturing something like you see at those big American auto auctions with colored ribbons flying everywhere, thousands of spectators, the lights, the energy , the electricity in the air! woohoo! Ok now we are talking! Let’s get in there and buy ourselves some bonds! Woooohooo! I’m buying bonds!

We’ve got China…I see Japan, Brazil! There’s Switzerland! Canada’s here! Norway! France! Holy shit! The entire planet is going crazy for these bonds! I gotta get my bid in! I’ve gotta get noticed here – I need to get those bonds!

Ok I need to relax.

Obviously this is not the case – but you can appreciate that under “normal circumstances” the purchase of U.S bonds / debt has had much greater appeal in the past, and that a “bond auction” would include a host of other characters aside from a lone bearded man in a Radio Shack suit, loafers with a vinyl duffle bag. By way of  sheer competitive bidding, the prices of bonds stays high – the rate of interest needed to be paid stays low.

A healthy, attractive investment environment in a country that is flourishing – attracts sizeable interest in its bonds. The bondholders win with a secure investment, and the country issuing the bonds wins with its ability to raise money, with very low rates of interest needed to be paid.

Trouble is – when a country can’t attract interest in its bonds, they are then forced to “incentivize” these purchases by raising the rate of interest paid out! In order to get the inflow of foreign purchases in bonds…the price of the bond falls…and the rate of interest needed to be paid out increases. (For example at one point during their crisis – Greek bonds payout rate climbed as high as 27%! – which we all know is unsustainable)

As much as you may have heard of the Fed’s current strategy of “stimulating the economy” with its bond buying – nothing could be further from the truth. The Fed is printing dollars to buy bonds as to not let the planet at large see/realize what real trouble the U.S  is in. If the Fed stopped buying bonds ( like 80 some % of available bonds every month ) the rate of interest would rise so rapidly as to signal the entire planets investment community ( much like in Greece ) – My god! – Something is very wrong over there! Look at those bond rates! If a Government has to offer such a high rate of return on its debt – things must be going down! Big time!

Frankly,everyone already knows this but the point being – the Fed cannot possibly stop its bond buying purchases now, as there is no one else there to buy them.

Unless they are prepared for complete and total “meltdown” and are willing to just face the music – the can will be kicked along a little further, then further – until the rest of the world makes the decision for them.

And the bond hall is “closed for renevations or until further notice”.

6 Responses

  1. Nfxtrader June 16, 2013 / 8:02 pm

    Good calls past few weeks Kong! Guerrilla tactics or should I say Gorilla?!

    • Forex Kong June 16, 2013 / 8:12 pm

      Rock n Roll Nfx!

      Let’s bank a couple nickels on this lil pop in risk!

      Short JPY’s / long commods already in profit here this eve! I’m not stayin long……but a geeerillla’s gotta make a buck.

      I’m active this week…and watching markets real close. Gonna play this bounce….quick n dirty.

      • Nfxtrader June 16, 2013 / 8:38 pm

        Choppy stuff Kong. I need quick reflexes like you. Did you see usd/jpy last couple weeks? Down 400 pips then up 400 pips then down another 400. Remember the good old times when usd/jpy would move barely 20 pips a day?

  2. schmederling June 17, 2013 / 6:45 pm

    soo true – I think everyone knows but is just playing along until the music stops – I personally think the music has stopped all we are hearing are the echo’s in the dance-hall….

    • Forex Kong June 18, 2013 / 7:03 am

      I’m with you there Schmed – In fact I’ve ditched any and all trades as of this minute.

      If everything hinges on Uncle Ben here Wednesday – I’ll wait until after to see what’s what as AUD and NZD continue to suggest there is really no “bounce” here at all.

      If so – great but I am likely just going to watch from the sidelines and keep my eyes on any opportunities that pop up – looking to sell risk.

Leave a Reply