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Bond Market in Wonderland


Keep your head! This is a new one for me…

On the image above, you can see that the one-month T-Bill is now yielding a negative -.005. I can’t recall ever seeing a time when, if you purchase a treasury security, you have to pay the government to loan them money instead of the other way around.

When I see things like this, I want to know if there is a wider problem in the world that is causing a rush to safety – something that has the potential to topple the world’s financial systems and crash the financial markets, for instance. To answer my question, I always refer to my trusty friend the TED Spread.


Regular readers of the blog know that i believe this is one of the most accurate and important charts to follow. Whenever there is an event that has the potential to topple the world’s financial systems, this graph will start to have peaks – much like you see on the left half. Those peaks on the left represent the precursors to the sub-prime debacle and the Lehman Brothers bankruptcy.

If you look at the right side, you see that we are steady-as-she-goes. This tells me that whatever is inducing people to invest their money for one month in treasury securities and pay the government for the privilege of doing so, it is not likely the start of something that will ultimately cause a stock market crash.

So, what could it be? My best guess is that its a bunch of hedge funds buying treasuries to put up as collateral against their margined position. The current correction is likely putting pressure on their positions and they need to add collateral or be cashed out by the margin clerks. The demand for the short-term paper is great so the yield has dropped to ridiculous levels.

This means that the current situation is likely temporary while everyone sorts out what it means to have the end of the Fed’s program of quantitative easing. I think the lack of clarity for investors was doubled down upon earlier this week when the Fed Chairman gave his press conference and seemed notably confused himself as to the likely course the Fed would take given the unprecedented situation it is in.

If only the men on the chessboard could bet up and tell the Chairman where to go…

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