Jan

7

 I've read some good pieces about why US Treasury prices should decline. However, this could be the WORST essay that I've read on the subject and it reflects badly on both the writer and those who forward it. This essay might not even meet the minimalist criteria to be a Zero Hedge post! Anatoly asks: "Where is the essay wrong?" I answer: "Where is the essay right?" Let's start with the statement: " As yield goes up, bond prices decline in a precisely proportional manner (and vice versa). "

1. I'm not going to waste everyone's time to explain that yields and prices do NOT move in a precisely proportional manner. (See "convexity" for an explanation.) But it's this sort of sloppiness in thought that renders the essay less than useless.

2. To characterize foreign central banks as "frantically" dumping treasuries is another example of misleading hyperbole. Frantically? Dumping? Please. (And even if this were true, where are the proceeds of those sales being invested? Silence is the answer.)

3. "When there is a sudden explosion of supply, the price buyers are willing to pay for that good plummets until enough new buyers enter the market to soak-up all of that excess supply". Yes, we've heard of supply and demand. But "Sudden explosion?" How about continued expansion? And he completely ignores the deleveraging in the private sector, as well as the persistent investor disinterest for other asset classes and a preferences for US sovereign paper.

4. "We have no visible buyers for U.S. Treasuries, yet seemingly infinite demand. More specifically, we have no visible sources of capital to even finance the purchase of all of those Treasuries". No visible buyers? Treasury reports the complexion of buyers after every auction. The Fed's balance sheet is relatively transparent about its holdings too.

5. He completely mischaracterizes and obviously misunderstands the recent announcement by Japan — (and conveniently ignores the fact that Japan's sovereign balance sheet and demographics are far worse than the USA at the moment.)

About the only point that I can find which is accurate in this puff piece is that the Fed's monetary policy is levitating the bond market. So long as the dollar has a bid, this can continue ad infinitum. I am not a bull on US Treasuries. Far from it. And I believe the Fed's current policy is reckless and misguided. But, this is not fraud, as they are being transparent about their methods and goals. Lastly, if you want to short the US Treasury market based on his worthless analysis — be my guest. But I'd guess Anatoly will have better success calling the bottom in natural gas!


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