The Bond Market

Sunday night update:  The dollar is up, bonds are up,  equity futures are down.

Timothy Geitner declared to the press circuit that he cannot say whether more bailout money will be needed.  Well, Mr. Geitner, that’s a vague way of saying that much much more money is needed.  The question is what process are you going to use to secure more funds?  Trying to get EVEN MORE bailout money passed through the mumbo jumbo soundbites that congressional hearings have turned into might not be a real popular way to go about it.  The business journalists that are covering this whole mess might really start to scratch  their heads and wonder.  You at least need to keep the press circuit on your side.

So, though you may not be able to get more bailout funds passed through the circus of congressional hearings and political double entendres, there is another very obvious way to fire up the printing presses and ease credit.  You already announced the plan.  You’ll buy back $300 billion worth of treasuries.  Though the bond market witnessed an initial jolt, no one seems to be taking this treasury buyback plan very serious.

To achieve it’s goal and ease credit more, the Fed has no choice but to drive bond prices higher.  Remember, markets don’t move, they are moved.  The Fed has a rather large set of tools to aid them in moving things where they need them moved.  I would not recommend taking the other side of their trade.  The old saying “don’t fight the Fed” is going to have a whole new meaning when you see the short squeeze they can orchestrate.

With this in mind, it is my opinion that we may be in front of an extreme outlier move higher in the bond market.  And when viewed through the eyes of Mr. Volatility, this is nothing but an opportunity.

I wrote in my March 9th post that at some point this year, the bond is going to be a massive short.  I have not veered from this opinion.  However, it is not a short yet.  It can go way way higher and very quickly.  Right now, it is the best tool that the Fed has to ease monetary policy.  I continue to hold calls in bond futures.  I believe the bond will ultimately be a huge short.  But that is not today’s business.  Today’s business is that the fed announced they are going to systematically buy back treasuries and calls in treasuries remain extremely cheap.

Peace