Monday, December 30, 2013

The Bondmageddon Zone of Death

Click to enlarge.

The 5-year treasury yield is shown in red.
The 5-year CD rate of national banks is shown in black.
The difference (when noteworthy) is shown in pink.
The bondmageddon zone of death is shown in green.

What's the bondmageddon zone of death? I believe that it is a special burial ground where misguided bondmageddon theories go to die.

I say this somewhat tongue in cheek of course. Unlike most these days, I can't say with any certainty where yields are headed. I can say that I see little evidence here that the recent trend higher in the 5-year treasury yield is sustainable though. I offer the following as my reasoning.

If the economy is so healthy and treasury rates are therefore rising in response, then why isn't it forcing banks to pay more interest on CDs?

How are banks getting anyone to buy the typical 5-year CD when the 5-year treasury yields so much more?

I offer an alternative theory. We're in Bondmageddon 2.0 and it will end much like Bondmageddon 1.0 ended. This coincides well with my long standing belief that we'll be stuck in ZIRP far longer than most believe possible.

February 2, 2011
More Dangerous Advice from Jeremy Siegel

Although Tips may compensate holders for future inflation, the interest rate that they offer is far too low to offset the risk of rising rates.

Note where February of 2011 falls in my chart above. Thanks for the Bondmageddon 1.0 warning Siegel!

What would we do without him? He waited until rates temporarily spiked higher and then warned us that rates might rise. In hindsight, kind of a crappy plan.

Let's apply this same line of reasoning to the weather.

I've noticed that the weather has been getting colder lately. Current swimwear has far too little insulation to offset the risk of falling temperatures. I therefore recommend that you purchase fully insulated GORE-TEX® swimwear right now in preparation for next summer's ice age! You can't ever be too insulated from risk! Lock in that protection right now before the next person does!

This is not investment advice. As always, just opinions. And sarcasm. Mustn't forget the sarcasm. Please factor the latter in should you choose to actually purchase swimwear based on what I've written here. Heaven help you, lol. :)

Source Data:
St. Louis Fed: Custom Chart


Joseph Constable said...

Thank you for this insight.

Rob Dawg said...

In an honest market mortgage rates would track CD rates not Treasury yields.

Stagflationary Mark said...

Joseph Constable,

Let's hope it doesn't lead people astray. It's definitely a contrarian opinion these days.

Nearly every financial "expert" keeps saying that interest rates are destined to rise soon. CNBC just keeps trotting them out over and over again. It makes a good story. The economy is recovering. Rates have risen recently so they will continue to rise. Yada yada yada.

Little thought given to what rising interest rates have done and will do to the lending industry (our economy's supposed lifeblood).

Perhaps it is just assumed that our weakened economy is strong and resilient in the face of all adversities. Dumbest theory ever in my opinion, but hey, maybe I'm wrong.

Stagflationary Mark said...

Rob Dawg,

In an honest market mortgage rates would track CD rates not Treasury yields.

Check out that impressive spread between 30-year mortgage rates and 5-year CD rates. Sigh.

I would also argue that in a sane economy where we could trust all parties to the best of their abilities and retail CD investors were fully informed about both current treasury yields and bank failure risk at the time of purchase, CD rates would always be higher than treasury yields.

# of US Federal Governments that have failed in past 10 years: Zero
# of US Federal Government monetary printing presses: One

# of US Banks that have failed in the past 10 years: More than Zero
# of US Bank monetary printing presses: Zero

Insurer of last resort when US Banks fail: US Federal Government

Just a thought.

FDIC: The Top 10 Mistakes That Cost Depositors Money When a Bank Fails... and How to Avoid Them

No one has ever lost a penny of FDIC-insured funds, but some people occasionally lose money over the insurance limit. While many of these consumers knew that their deposits exceeded the insurance limit, some did not. We want you to learn from them.

(Keep in mind that the FDIC limit has changed since that article was written in 2000.)

That's just the top 10 mistakes of course. One would expect there to be more.

Here's one. You buy one long-term CD at one bank at the limit and another long-term CD at another bank at the limit. The two banks merge together into one bank and then that bank fails. What happens then? I suspect profanity would be uttered.

Fritz_O said...

What hath happened to the bond vigilantes?

Do they no longer possess their senses? Have they becometh ruined?

Heaven will be happier over one lost bond vigilante who returns to god than over ninety-nine others who are righteous and haven't strayed away!

Stagflationary Mark said...


Bond Vigilante III: Death of Real Yields Wish - starring Charles Bronson

Hell hath no fury like a bond vigilante scorned.

Rated R(ecession)

Fritz_O said...

ZIRP has a domino effect. Once ZIRP is committed, a series of CONsequences follows.

The gods of ZIRP would forgive our sins if we asked but unfortunately the CONsequences have already been set in motion.

If we would have thought through the possible CONsequences before we acted we might have stopped the nonsense and saved ourselves much sorrow and suffering. The gods of ZIRP would have intervened and made their bitter CONsequences less severe.

ZIRP has already caused severe damage. At this late date, pleading for mercy will not stop the angel before his mission of death is complete.

Savers must die.

Stagflationary Mark said...

Last chance to work in some economic acronyms for 2014!

ABCIRD - American Bank Certificate of Interest Reduced Deposit (It's abcird!)

DAS FACEBOOT - Didn't Actually Subscribe! Found Alternative Chat Experiences! Bank On Other Tweets! (Alarm!)

RISC OM - Reduced Interest "Safely" Cushions Overpriced Markets (Risk om, baby! Risk om!)

SEARS - Superstar Eddie Abandons Retail Sales (Lampertized pillar of strength!)

STRONG BYE - Stocks To Rally On Negative Growth! Borrow Your Earnings! (Goodbye!)

SURE THINK - Stocks Undervalued in Real Estate! Titanic Housing Interest! Not Kool-aid! (Group think! Can't lose! Unsinkable!)

WALL CREEP - Would Any Lender Lie? Colossal Real Estate Earnings Permanent! (The NAR sends a shill down my spine!)

Rob Dawg said...

REEK, real estate earnings killed.

Stagflationary Mark said...


It's the perfect cologne for former NAR chief economists. Very popular with the ladies no doubt. ;)

There's never been a better time to REEK!

Rob Dawg said...

SLIME, special line monetary exclusions.

Stagflationary Mark said...


I'm inspired by your SLIME!

ROTC - Recurring One Time Charges

It takes military discipline to know when to enhance the value of executive stock options.

This quarter? Yes.
Next quarter? Yes.
Each additional quarter? Yes.

mab said...

Last chance to work in some economic acronyms for 2014!

Reminds me of family car trips down South many years ago - 50 miles of billboards claiming "last chance to buy fireworks".

Can't be bothered with an acronym, but here's a thought for 2014:

Give war a chance!

That Syria false-start/fail was "really" disappointing. Seriously, John "swift boat" Kerry unequivocally claimed "we know they did it". And even John McCain couldn't sell a Syria bombing despite photo ops with terrorists, I mean freedom fighters. What gives?

Anyway, it's all about spreading Imperialism, I mean democracy. Except in countries like Saudi Arabia where totalitarian puppet regimes get the nod. But I digress.

A new year, a new mayor. I'll really miss Mike Bloomberg. He routinely reminded us "they hate us for our freedoms." Americans can't hear that too often. No siree. They love our drones and one sided "diplomacy" but hate our freedoms. What else needs to be said over and over?

Stagflationary Mark said...


Can't be bothered with an acronym, but here's a thought for 2014:

Give war a chance!

GWAC-POT-US - Give War A Chance - President Of The United States

Gwacpot theory for the win!