Author Topic: $2.5 trillion to refinance?  (Read 5421 times)

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Re: $2.5 trillion to refinance?
« Reply #10 on: December 29, 2009, 07:21:41 AM »
IMO, this issue has one point in common with the housing bubble. If you remember, home prices started to come down in 2006, not in 2008. Then came the two Bear Stearns hedge funds that collapsed in the Summer of 2007. It took over a year after this huge warning sign until the market really unravelled. So I think that this overhang of U.S. bonds has the potential to become a huge problem down the road. Most observers dismiss its impact or just like it was for the deflating U.S. housing bubble.

The issue for me has been selecting the right instrument.

1- TBT is a 2X short ETF 20 year U.S. treasury index. Recent history has shown that these leveraged ETF's are not good long term investments. If you are correct right away then it will work fine. Unfortunately, if you are temporarily wrong, you could see no gain and even a loss for being right in the end.

2- Short TLT is another option (long ETF 20 year U.S. treasury index, but 1X). Karen Finerman on Fast Money is using that approach. It is not as exciting as TBT and you will have to pay interest to holders, but if you hold longer term, you are guaranteed to match the inverse result of that index. Although, is it worth it? Are the gains going to be big enough to justify getting into this position? Long bonds don't double and triple or come down 50 to 75% like stocks.

3- There are options available on TLT and TBT to augment returns. But, before you augment returns, you have to gain enough to repay your premium which is not guaranteed depending on timing.

4- Constant maturity swaps as discussed by Chou and Klarman seem to be the ticket. They are cheap, long term, but they must require a fair bit of margin power. They also seem available only to institutions. I have checked and I cannot get my hands on them. If one of you has found a way to buy these contracts I would love to know how you did it.

So I think that selecting the right instrument is very important to take advantage of this thesis. TBT was attracting me until I started to realize that if the U.S. stock market corrects near term, that long bonds are likely to rally. A knee jerk reaction if you will but, very painful if you are into a 2X ETF. You need an instrument that will fully reflect what will happen longer term and not something that will be wiped out by short term variations. Gold and silver are also alternatives, however they are not 100% correlated to a drop in price of long term bonds. They should be bought on their own merit and they are also likely to correct along with the U.S. stock market if recent history repeats.

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Broxburnboy

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Re: $2.5 trillion to refinance?
« Reply #11 on: December 29, 2009, 08:07:22 AM »
The problem of course is not just related to debt refinancing or rollover, but financing an increasingly widening US deficit.

The problem has become who is going to buy the debt? and the problem is greatest now, this year, making, in my opinion,
TBT a timely, levered hedge on rising long term interest rates.

http://www.shanghaidaily.com/article/print.asp?id=423054

My opinion only.. subject to change if the world embraces rollover and new US debt at current rates of return (i.e negative real).

SharperDingaan

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Re: $2.5 trillion to refinance?
« Reply #12 on: December 29, 2009, 09:41:39 AM »

Keep in mind that if you're going to roll it's highly unlikely that you'll go with anything longer than 180 days; simply because global future rates are expected to be higher than they are today. The bubble gets bigger, the duration shortens, & volatility rises; hence a market distortion is largely enevitable.

That 2.5T is also understated. An individual US state that can't roll its debt can effectively refinance with short-term debt backed with a federal guarantee - & some big states are in deep sh1t.

We've allready seen sovereigns increase rates (Australia) to dampen inflation, & its highly likely that others will follow within 6-9 months (Canada). Hence the US either raises real rates to mantain the roll-overs, or it prints $ to immediately inflate & devalue the USD (& promote trade). Each has ugly consequences.

The cheap money is coming to an end.

SD


 

Zorrofan

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Re: $2.5 trillion to refinance?
« Reply #13 on: December 29, 2009, 11:54:04 AM »
One symptom of the cheap money coming to an end may be the rising yields on longer-term T-bills. If the federal government is having troubling rolling over debt already this would explain why rates are higher even though there is not yet a clear sign of inflation. The steep yield curve is a sign of harder debt refinancing not a strong recovery as some economists may be predicitng.....

cheers
Zorro


Keep in mind that if you're going to roll it's highly unlikely that you'll go with anything longer than 180 days; simply because global future rates are expected to be higher than they are today. The bubble gets bigger, the duration shortens, & volatility rises; hence a market distortion is largely enevitable.

That 2.5T is also understated. An individual US state that can't roll its debt can effectively refinance with short-term debt backed with a federal guarantee - & some big states are in deep sh1t.

We've allready seen sovereigns increase rates (Australia) to dampen inflation, & its highly likely that others will follow within 6-9 months (Canada). Hence the US either raises real rates to mantain the roll-overs, or it prints $ to immediately inflate & devalue the USD (& promote trade). Each has ugly consequences.

The cheap money is coming to an end.

SD