A little birdie told me that Lloyd is trying to figure out why the bond market is broken and is researching the subject. Trading revenues in fixed income at GS are awful. What is going on? Well the bottom line is that the Fed has bought much of the supply leaving the yield seeking muppets to fight over what is left in the market place. The problem is liquidity has dried up and a once robust bond market has become a perverted Frankenstein market. Repo collateral fails are on the rise and are at the highest level since the Lehman collapse. Regulation and Fed perversion have forced big players on the buy side into the derivatives market. Why is that a problem? Because derivatives are leveraged vehicles and leverage kills when yields rise.
Recently it was rumored that the Fed was looking at Bond Fund exit fees. My sources tell me it is not a rumor. Why would the Fed pursue such a strategy? Conspiracy theorists would say the Fed sees something ugly on the horizon. Regardless the mere fact that the Fed is looking into this suggests that there is a problem. When yields rise the potential for a huge bond market dislocation appear to be epic. Why should stock investors care? Primarily because when there are margin calls in the bond market there will be zero bids. This is due to regulation that has reduced the Streets capacity to commit capital for fixed income trades and people will be forced to sell what they can and that will be stocks. Watch the bond market as it may be a key to unlocking the extended bullish energy in the stock market to the downside. Bottom Line: When Lloyd and the Fed are looking into the bond market structure we should all proceed with caution.
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a real conspiracy theorist might say they float the idea because they want you to sell…
Can you elaborate on the definition and implication for “Bond Fund Exit Fees?”
Also, with regards to “Primarily because when there are margin calls in the bond market there will be zero bids. This is due to regulation that has reduced the Streets capacity to commit capital for fixed income trades and people will be forced to sell what they can and that will be stocks,” I would disagree with this as a last minute revision to the Volker rule allows banks to make markets and hold inventory in Government backed securities such as T’s and MBS.
Right now I think it is a wait and see period to understand how the market dynamics trade without the Fed as buyer come this fall. There are a bunch of MBS funds that have sprouted up since the fin. crisis, it will be interesting to see how this plays out.
This was an interesting article that highlighted this:
http://www.bloomberg.com/news/2014-06-25/citigroup-team-s-mortgage-bets-undeterred-by-volcker-rule.html
The U.S.A. is growing fast.Deficits will
be an old problem soon.With all that new
money the fed will be able to fund anything.
I don’t see how this ends badly.
What has me scratching my head is how the fed can exit the market. The way I see it the problem breaks down into 2 distinct but linked problems:
1) QE has to end at some point, as you can’t keep re-defining inflation as eventually people just won’t be able to buy shit regardless of the CPI
2) You can’t end QE as you (the government/fed) is such a large part of the bond market, exiting it would lead to rising rates, which in turn would make the debt burden unservicable.
Any thoughts?
bc21
The sell side is short. They need bonds. so yes they want people to sell. Lloyd however is confused and wants to figure out why his trading volumes are down.
Gorby,
I assume you are talking about future growth last I checked we just printed -3%
TJWP,
The market will eventually exert nature upon the system. How that looks can only be bad.
The fed may just decide to hold all those bonds they bought. No one ever said they had to sell. In fact, I can see the scenario where selling is almost impossible.
But anyways, I highly the doubt the fed is going to contribute to flooding the market with supply as they would just shoot themselves in the foot.
This scenario has been touted for about 2 years but yields have only gone down. How’s the short bond positions going?
Also, if bonds do sell off and yields rise, I’m sure there’ll be plenty of foreign capital stepping in. For example, if I was a Japanese pension fund with the choice of 0.5% yield on a JGB or a 3-4% yield on the 10 year what would I choose? I reckon the Chinese would come back too not to mention the Europeans. There will be obviously some short term vol but you watch the Europeans, Asians step in. Bigger pockets than some pizz ant hedgie getting margin calls.
Extra supply will definitely be met with extra demand.
bluestar
Thanks for responding.
Jobs are increasing
big time.Companies don’t hire for
the halibut. It is be careful time as all
the future growth I’m predicting might be priced in but it’s go U.S A time now.
Why care indeed for the poster boy of who should be in prison, the only person whose paycheck was saved daily by Ben, and yet still touted as having integrity.
Randomness
Thats what I mean. When Lloyd cares it is about GS and nothing else.
Gorby,
I disagree with you but we shall see.
Clawhandle,
The problem is if we have a deterioration in credit. Many of these bond funds hold illiquid crap.
owg144
Two things. The street has downsized staff and their books. My friends on the equity desks say the ROE may does not work for only mortgages and treasuries. Its the illiquid stuff that matters in a panic. The street won’t be there in a panic.
By bond fund exit fees i mean that to get your money out you need to pay PIMCO and BLK a fee to sell.
bluestar, thanks for the reply…
that was my point though. trading rev’s are down bc there is no supply… those still holding are either holding bc they have to, or holding bc they realize what a shit show our market/economy is… lloyd and every other bank ceo knows this… fed can’t sell, they know what will happen if they do… a real conspiracy theorist may think the fed really only cares about the major banks, and thus would try to help generate more supply/transactions/activity/revenue…..
bc21
Maybe I was not clear in this post. But my birdie told me he wanted to know where all the bonds had gone. The surprise was that the banks don’t own any.
Bingo… they actually believed their own “rates have no where to go but up story” and now they’re SOL.. hahaha
bc21
The moment they cover their shorts rates go higher. I have seen this movie before.
do you think we see rates move higher before we see a material widening in spreads (a la 07/08)?
bc21
Hard to say. the distortions are so massive and we are in uncharted territory. when I was at BLK Kieth Anderson fixed income CIO had on the world is going to end trade for three years. The powers that be made him take it off on 2/27/2007. Yes the day it all began to unwind. Classic.
A technical guy that I follow called the three year cycle low in bond prices in January. if he is correct and so far he is we have another year of bond prices grinding higher.
i agree – tough call… but i do not see a scenario where rates rise significantly w/o impacting equities. 2013 will not happen again in my lifetime. i’d rather wait it out in fixed income then buy stocks (US mainly).
here’s a take from mkt anthro? here is there take: http://www.marketanthropology.com/2014/07/follow-yellow-brick-road.html
6th large chart from the top. i have to say, w/o an inflation spike, which i am not betting on yet given our demographics, i am inclined to agree w/ them.
meant to say “do you ever read… here’s there take” but i don’t proof read well haha
Love the responsiveness here, as well as the actual posts. Keep it up!
so why isn’t gold popping to the sky with all these fiat money systems rolling toward the big fence at the bottom of the hill?
Bluestar, any thoughts on PCLN? Not sure what to do here.
Ah Bluestar, welcome back. Please explain how your opinion piece (no trade recommendation) is differentiated at all from the thesis that we’ve all been hearing since 2012? Short bonds, the crisis is coming, stock the bunkers with food because you don’t know whats about to hit us. This line of reasoning has been absolutely useless unless the aim to fear monger. Clearly there is demand (and liquidity) in the bond market because despite the fact that the Fed has started its (god forbidden) tapering, yields have only grinded lower?
Also, you keep mentioning this impending crisis that we are heading into, that the fundamentals are deteriorating everywhere. Can you explain what fundamentals you are referring to? Because in all honesty the hyperinflation, goldbug, Fed hating pundits out there have gotten it completely wrong and are still clinging to the same thesis.
The main tenet of your thesis is that the Fed has been propping up the stock market correct? Well know they are stepping back and neither the equity markets or bond markets are collapsing. At what point will those who believe in this thesis admit they are wrong (that’s when I’ll start selling).
The Fly…….
Gold oddly enough seems to have bottomed in December when the Fed began to taper. YTD it is beating the stock market but I don’t own gold.
Quality Control,
I don’t have much of an opinion on PCLN. Looking at the very long term chart I would be hesitant to go long for a buy and hold investment. Short term I don’t have a clue.
Forget Alpha,
Thanks for the response. First my purpose in writing this was because we have two new pieces of info. 1) Llyod is nervous and 2) The Fed is looking at exit fees. In terms of bonds I think treasuries will continue to rally like they did in 2007/2008. The bonds that have an issue are all non government much more illiquid types. In terms of fundamentals we just printed a -3% gdp number. Don’t tell me it was snow. Consumer stocks are rolling over and financials are lagging badly. Since tapering the second derivative of the stock market rise has slowed considerably, risk on russell 2000 is negative year to date. I don’t think we get hyperinflation and I have no idea where gold is going. When they stop tapering I think stocks are vulnerable and we are already seeing it underneath the surface of the averages.
Bluestar, I am long-long gold and adding to it every month. Not as a quick trade gamble but rather as a 10-15 years investment. The dollar has got to plummet in the next decade or so.