Prices of US Treasuries fell for a third consecutive day Thursday as excess supply swamped the market for government debt. Today's specific culprit was a huge 7-year note auction, though we are at last seeing an overall awakening by bond traders to the reality that a mountain of supply is coming and it will not be slowing down. The first cracks are finally beginning to show in the last remaining asset bubble. Delicate fiscal issues never discussed openly as recently as 12 months ago, are now standard fare. The economist wondered aloud if the US will be forced to default. Clusterstock has asked 'Default or Hyper-inflation? An academic paper is floating around questioning the solvency of the Fed. Even a South Korean floor trader glibly mentions the possibility of US default in this Bloomberg piece. Not the least, S&P put the United States on 5-year credit watch negative in the middle of last year.
Furthering the concern is President Obama's FY '10 budget released today which calls for a deficit of $1.7 trillion. Don't believe the hype. The real number will be closer to $3 trillion before the year is through as we push off the inevitable nationalization with further capital injections into troubled banks and now insurance companies. And the deficit will be substantially larger if Geithner actually grows a sack and decides to nationalize Citigroup and Bank of America. There are also 10 more months of AIG, Fannie and Freddie and their associated nightmares.
The previously myopic bond traders have finally caught on to the game. Increased default riske are also being seen in the government CDS market. In the video, Santelli reports the price of US Treasury CDS have settled north of 100. For newcomers, this means that it now costs $100k to insure $10 million in US government bonds for 5 years. Twelve months ago this same insurance cost $2,000. If you speculated in US CDS you have made 50X times your money in a little over a year. I check several government CDS prices once every week. I remember in January of '08 US CDS traded for 2 then Bear Stearns sent them to 18. After a pullback to 12 in the calm aftermath of April, they began an inexorable creep higher until the financial meltdown last fall and the failure of Lehman sent them shooting toward 80. Two weeks ago they traded at 82 and Tuesday they crossed 100. In March of '08 we lost our distinction as the safest government paper in the world. That honor now belongs to the German Bund, though their CDS prices have also been rising as it becomes clear they will be forced to bailout a few weaker member nations potentially including Italy, Greece, Spain, Ireland, Austria and perhaps even Switzerland if Eastern Europe's currency and debt implosion gets serious.
So all of this is finally being reflected in the prices of US government bonds. Though the short term will be noisy in both directions, the long term trend is clear. US government debt costs are headed higher and treasury prices lower. God forbid the Federal Reserve printing presses ever make a dent in the asset deflation or it's katie bar the door. I'm 42 and old enough to remember the 1970s where my money market college savings account grew 15% annually. Paul Volcker must be freaking out finding himself part of the Obama spending machine and the elite B-52 Bernanke printing unit.
The best way for traders and investors to profit from this eventual decline in treasuries is to short TLT or purchase (go long) the double short etfs TBT and PST.