Looking back into last week treasury bond sell-off I decided that the puzzle of the reason for that to happen is not resolved yet and I need to throw my three cents (inflation-adjusted two cents).
Most media sources posted that rebounding economy revived inflation and rate increase scare. I’m sorry, it’s hard to believe for me. First, the trailing 12-month inflation is decreasing and is already not above the Feds comfort zone. Second, as reported here, “this does not seem to be about inflation”, as inflation-protected TIPS are not in panic move.
Maybe China is dumping treasuries? Maybe, I don’t know. But why would they?
Then I came to this article, which claims that the source of large sell-off of treasuries are, probably, the mortgage servicers. They need to sell treasuries to offset the decline in mortgage pool values. But why so fast? You know what is the process that usually triggers the sharp sell-off of treasury bonds?
It is called “Involuntary inventory accumulation”. This process is sort of “margin call” for corporations, when they experience a sharp decline in sales and dramatic increase of inventories. To cover the short-term obligations they need to urgently borrow money at any price. They don’t have time to issue bonds or raise capital. They need money so fast that they just borrow at prime rate, pushing interest rates up and making bonds to collapse. You can read about this here or here.
Usually the involuntary inventory accumulation happens right before the recession starts. I’m not claiming that this is what we just experienced, but if it is, then we will enter the next recession before the summer ends.
We shall see very soon
June 9, 2007 at 10:10 pm
This is the reason for US Bond sell off:
http://www.markit.com/information/affiliations/abx/history
Watch ABX next week.
June 10, 2007 at 5:09 am
Thanks for the info. The movement last week was very interesting.
June 10, 2007 at 11:57 am
To summarize:
1. The reasons for sharp drops in long T-bonds are usually unknown at the time they happen, you must wait
2. One of the possible reasons is a credit event. Credit event always looks like that
3. There is always a credit event and drop in long T-bond prices at the beginning of the recession
4. The low of T-bonds in early recession panic is always a good buy. Later they go much higher
Note: I’m not economist, I’m saying what I think, do your own research
June 11, 2007 at 2:27 am
Another way to look at rising yields is the demand for money is increasing, but the supply is not there for some reason. The reason, as you mentioned, will be announced later. The interesting coincidence is that both stocks and bonds started to drop AFTER Chinese quietly left the US. Something is up.