Coming Bear Market in Bonds

WHO'S NOT SELLING BONDS?
First, the US Treasury has hundreds of billions of dollars of bonds to sell to fund the trillion dollar deficits Congress is mandating.

Second, the Federal Reserve will be selling the trillions of dollars of securities they have purchased in the recent expansion of the monetary base.

Third, and finally, any investor who owns bonds will be selling to avoid the coming bear market.

Paterson is advising its clients to continue to extend the maturity of liabilities past the 5 year mark, and look at 10 year liabilities, or more.

TACTICS
Continue to shorten the maturity of assets and use money market arbitrage to improve earnings.

Consider borrowing long term deposits.

Use extreme caution on long term lending.

STRATEGY
Warn senior management and the board that a disaster is in the offing.

The flood of money recently added by the Fed will either cause inflation or increases in long term interest rates - or both.

Apology

For the past three months Paterson has been busy working with existing and new clients to avoid the disaster in the credit markets.

My apologies to students, casual readers, and potential clients for the absence of this weblog.

Paterson is back, explaining the situation and suggesting tactical and strategic plans for dealing with the extended downturn.

Markets at Major Turning Points

Gold at Major Support










Most of the evidence suggests the bounce will be small, and prices will continue to drop. But, traders don't bet it that way.

Bond Refunding Successful
US Treasury sold $27 billion of notes and bonds following the largest increase in CPI since the Volcker years.

Treasury Note Futures









Treasury Bond Futures









Note that ond prices surged following a successful auction.

Corporate Bond Spreads Falling











Stocks finding Support

NYSE Composite











S&P 500











Russell 2000











SUMMARY
10 years from now this time will be seen as a major turning point in stocks. With inflation banished, and the bull market in bonds ended, only stocks will have the investment potential for the future.

Remember, stock prices rise when interest rates come down and stay down.

Fed and Treasury Up Again

Recent moves by the US Treasury to purchase equity in Fannie and Freddie tell us two things.

1. They are in danger of going bankrupt.
2. The treasury will not allow them to go out of business.

Even though shareholders might lose all their money, the companies will still be reconstituted by injections of US government cash.

Along with this announcement came the news that the Fed will lend to the mortgage buying behemoths if necessary.

These two actions will support home lending by ensuring the ability to sell mortgages in the secondary market.