What just happened?

[MediumTex]

I saw that bonds swung about 2% an hour or so ago.  They were flat before and have been flat since.

What was that about?

[Pointedstick]

Looks like the bond market just woke up or something. Not a terrible day for the PP at all so far! It's amazing what a smooth ride it's been in the last few weeks. My VP is down 20%, by contrast! 

[MediumTex]

Looks like the bond market just woke up or something. Not a terrible day for the PP at all so far! It's amazing what a smooth ride it's been in the last few weeks. My VP is down 20%, by contrast! 

It looks like gold popped about the same time.

Normally it's a Fed announcement or something similar that does that.

The PP grooves along, like a clock in a thunderstorm.

[dualstow]

uh, the election?

[Gumby]

If you ever see LTTs move violently around 1pm, it's usually because of a 30-year Treasury bond auction. That's when they typically happen.

[Gumby]

Yep... 30-year bonds were auctioned today:

http://www.treasurydirect.gov/instit/an ... 1108_1.pdf

Though, if you look at the charts, they just kind of went back to normal after the auction (mirroring the day's losses in stocks). They were asleep before the auction. Guess people didn't realize that all that crazy government spending would eventually be used to buy future government debt

[MediumTex]

Yep... 30-year bonds were auctioned today:

http://www.treasurydirect.gov/instit/an ... 1108_1.pdf

Though, if you look at the charts, they just kind of went back to normal after the auction (mirroring the day's losses in stocks). They were asleep before the auction. Guess people didn't realize that all that crazy government spending would eventually be used to buy government debt

Must have been a good auction.

[Gumby]

I dunno. Looks pretty normal to me. I think maybe people were expecting a bad auction, but that didn't happen. And, as I said, LTTs just went right to where they were supposed to go (i.e. offsetting the day's stock losses).

[melveyr]

Whoever says bonds are boring just needs to extend their duration exposure 

[MediumTex]

Whoever says bonds are boring just needs to extend their duration exposure 

It's amazing how few people understand the bond market, even investors who have been at it for a long time.

[AdamA]

Speaking of bonds...

All this talk about the "fiscal cliff" makes me want to buy some call options on TLT.

Anyone thinking of it? 

[MediumTex]

Speaking of bonds...

All this talk about the "fiscal cliff" makes me want to buy some call options on TLT.

Anyone thinking of it?

You mean like a "do it for doodle" kind of trade?

My "I did it for doodle" trade last year leading up to the debt crisis would have been a 10 bagger if I had held on to it.  I was too smart, though, and cashed out when it had doubled instead of letting it ride.

[AdamA]

You mean like a "do it for doodle" kind of trade?

Yup.  Exactly like that.

My "I did it for doodle" trade last year leading up to the debt crisis would have been a 10 bagger if I had held on to it.  I was too smart, though, and cashed out when it had doubled instead of letting it ride.

That's the hard thing about this type of trade.  Impossible to know when to exit the position.

[MediumTex]

You mean like a "do it for doodle" kind of trade?

Yup.  Exactly like that.

My "I did it for doodle" trade last year leading up to the debt crisis would have been a 10 bagger if I had held on to it.  I was too smart, though, and cashed out when it had doubled instead of letting it ride.

That's the hard thing about this type of trade.  Impossible to know when to exit the position.

I would be surprised if bond yields aren't lower on the day of Obama's inauguration.

***

("Inauguration" is a funny word.  I don't think I've ever written it before now.  As I typed it I felt like I was describing a process that causes a piece of drilling equipment to malfunction.)

[Tortoise]

It's amazing how few people understand the bond market, even investors who have been at it for a long time.

That's because understanding how bonds work requires knowing a little bit of math. And few people know math beyond arithmetic.

[melveyr]

It's amazing how few people understand the bond market, even investors who have been at it for a long time.

That's because understanding how bonds work requires knowing a little bit of math. And few people know math beyond arithmetic.

Totally agree.

The next level is understanding capital structures for corporations, and then monetary structures for a currency. It's all about who is first in line. It's way different than doing a "bottoms up" analysis on some widget maker. After really diving into it, I have found the Treasury market to be infinitely more fascinating than the stock market.

[moda0306]

It's amazing how few people understand the bond market, even investors who have been at it for a long time.

That's because understanding how bonds work requires knowing a little bit of math. And few people know math beyond arithmetic.

Totally agree.

The next level is understanding capital structures for corporations, and then monetary structures for a currency. It's all about who is first in line. It's way different than doing a "bottoms up" analysis on some widget maker. After really diving into it, I have found the Treasury market to be infinitely more fascinating than the stock market.

^That.

Though I'll add the caveat that I'm starting to become quite curious as to how much these markets are compared to one another and priced against one another.  For instance, the depth of our '81 recession gave us ridiculously lucrative P/E ratios, and some people are looking at our current stock market and predicting huge drops to give us similar P/E ratios.  I tend to think that the market, just as it looks at safe-bond rates to determine whether gold should rise or fall, will look at bond yields to help decide how we should price stock-market earnings.  Considering the astronomical interest rates in 1981, is it any wonder that the stock market was priced to reward the market with 12.5% earnings yield based on the last 10 years at the time?  I certainly can't see there being something similar today, given how liquid publicly-traded securities are, unless bond rates rise, or we have another financial crisis.

But are we in a macro-position where bond rates are going to rise as the stock market falls??  I think absolutely NOT, with our balance-sheets in shambles, and demand being so inadequate.

This is one area that I think deserves a lot of attention, and fits nicely into our mutual interest in macro-happenings, and less about whether company A is going to make a widget cheaper, better, or more appealing than company B.

[melveyr]

Moda,

Do you have a VP where you speculate on macro? Or do you just enjoy the show? I know that you enjoy following it.

Edit: Yeah I agree you have to take both into account for any analysis. Additionally when looking at equities the NI is a residual after paying off the bond holders. If you don't understand the structure about who is first in line, it is impossible to determine the fates about who is last in line. I think this is important when zooming out to the monetary system as well: Treasury holders are first in line for the dollar economy, sometimes that is worth a lot but other times the risk of simply capturing the residual amounts pays off.

[moda0306]

I bounce in and out of the 3 volatile PP assets as I believe they are a bargain in the short-term.  I've done pretty well but haven't tracked it.

I think as long as we are in a balance-sheet recessionary period, we'll continue to see the inverse relationship between stocks and t-bonds. I think the biggest threat to recovery is some kind of spending cuts or tax hikes by the gov't.

I like to trade the ups and downs of 30-year bonds between 2.6% and 3.1% yield.  Why those?  No friggin idea.  I'm overall moderately bullish on the stock market.  DOW 16,000 by the end of Obama's term.

[melveyr]

I think as long as we are in a balance-sheet recessionary period, we'll continue to see the inverse relationship between stocks and t-bonds. I think the biggest threat to recovery is some kind of spending cuts or tax hikes by the gov't.

It's interesting how watching the PP can give you a decent barometer of macro worries.

Treasuries and stocks trading inversely?: The stock market has deflationary fears.
Gold and stocks trading inversely?: The market has some inflationary fears not compensated for in bond yields.
Both gold and Treasuries trading inversely to stocks?: The market is just plain scared.

[dualstow]

.  I'm overall moderately bullish on the stock market.  DOW 16,000 by the end of Obama's term.

They say the market does better with Dems at the helm. I don't have the stats on that but I hope to find them soon.