Supply fears start to hit Treasuries

I have two problems with this scenario.

1. When everybody knows about a problem, it doesn't happen.
2. When everybody understands a problem, it gets solved fast.

I'm betting on 2.

* * * * * J B K * * * * *

San Francisco

The bond vigilantes are finally flexing their muscles. A long period of stability for the US government bond market showed signs of cracking this week as a lack of investor appetite for new debt sent the benchmark 10-year yield to its highest level since last June.

For more than a year, analysts have been warning that record sized debt sales by the US Treasury were at odds with a 10-year yield sitting comfortably below 4 per cent. This week, the yield on 10-year notes jumped from 3.65 per cent to a peak of 3.92 per cent on Thursday. On Friday it was 3.87 per cent.

Chart: TreasuriesFalling inflation, rising unemployment, the housing market slump, the Federal Reserve's policies of a near zero overnight borrowing rate and its purchase of up to $1,700bn in bonds have all helped keep Treasury yields near historic lows.

But this week the mood shifted as yields for $118bn of new US debt were much higher than forecast, sparking overall selling of Treasuries. Sentiment also deteriorated in the UK bond market after the government's budget ahead of a general election expected in May failed to resolve doubts over future spending and debt reduction.

http://www.ft.com/cms/s/0/c51fbbce-3908-11df-8970-00144feabdc0.html

Yellen Says She’ll Be Ready to Raise Rates When ‘Time Has Come’ - Bloomberg.com

Alan Greenspan in a skirt.

This is another San Francisco earthquake just waiting to happen.

Pray for the health and long life of Bernanke.

I am.

* * * * * J B K * * * * *

San Francisco

March 24 (Bloomberg) -- Janet Yellen, president of the Federal Reserve Bank of San Francisco, said that while it's too soon to raise interest rates, she'll be ready to do so "when the time has come."

Yellen said the Fed's pledge to keep rates low for "an extended period" was "appropriate" and that it made "no particular time commitment." In a speech yesterday in Los Angeles, she discounted concerns record budget deficits might fuel inflation.

"The Fed has to be ready to take away the punch bowl when it's necessary," Yellen told reporters after the speech. "When the time has come, am I going to support raising interest rates? You bet. I don't want to see inflation pick up."

http://www.bloomberg.com/apps/news?pid=20601068&sid=askizRCWdj2Q

Ackman’s Greatest Short - MBIA - Bloomberg.com

The mortgage insurance companies were the canaries in this coal mine. MBIA, MGIC, and PMI.

To anyone who was watching, it was obvious that there were too many adjustable rate loans made to people with insufficient down payments, bad credit, and low income.

All that was necessary for the cave-in was a sustained increase in short-term interest rates. The idiot Greenspan provided the impetus when in 2004 he started raising Fed Funds from 1% to 5.25%.

By the time it was over, all the mortgage insurance companies were destroyed, as were Fannie and Freddie, the mortgage market was in ruins, CDS issuers were bankrupt, and the economy was collapsing.

* * * * * J B K * * * * *

San Francisco

"Our newest and largest [short] investment is on an extremely highly levered, yet AAA-rated financial institution, which we believe has inadequate reserves, undisclosed credit- quality problems, aggressive accounting and substantial unconsolidated indebtedness contained in off-balance-sheet special-purpose vehicles," he wrote. The position had the potential to generate a return of about five times the fund's total assets if it was successful.

Though little known outside of Wall Street circles in 2002, MBIA ranked as one of the five biggest financial institutions in the country in terms of outstanding credit exposure. It shared that distinction with Bank of America Corp., Citigroup Inc. and government-sponsored mortgage lenders Fannie Mae and Freddie Mac.

http://www.bloomberg.com/apps/news?pid=20601108&sid=aLmOb9zzVZ9A