Bonds: Grandfather Paradox

Call it what you will, a paradox, an en enigma, oddity or a mystery. The Grandfather Paradox, that neat conundrum whereby you could travel back to the past, kill your grandfather and then you would never be born, and so never be able to travel back in time to kill him. Impossible right? What has been has been. You can’t change it now. It’s the same thing with the bond markets today.

One thing that some might like to do is go back right now and kill the ‘grandfather’ that had the idea to have low interest rates making it easier to sell bonds, but it’s that paradox that has been created. The bonds were meant to keep us safe and now they have made us even more debt-ridden and debt-dependent. Trouble is we can’t change that now. We have done it. The bond market is tapering off and that looks like it is set to make us sell off those bonds even more. If those bonds are off-loaded to cash in now, the market won’t be able to hold out and put up with that. It will just spiral out of control. What was originally intended to keep us safe, looks like making us suffer. What was meant to get us out of debt will draw us further in.

Bond markets have been higher on average since the financial crash of 2008. That was aided by the inflow of cash from other countries that wanted to revive. But, now we have the shaking fear that stimulus is over and people are going to sell. Bonds are falling and quickly. Recent sell-offs may still be continuing.

Yesterday, Us Treasury yields were at their highest level for over a year and that was mainly due to the fact that the Bank of Japan turned down the possibility of continued measures aimed at stabilizing the volatility of the market. Ten-year Treasury yields increased to 2.26% (+4.5 basis points) and the sell-off is set to increase this week because of that. The real test will be on Friday when the Department of Labor Statistics issues the employment statistics. If the figures are better, then the Federal Reserve may fix a set date for the tapering of the stimulus program. It is a vicious circle yapping at our ankles.

Just today the 10-year note yield was up 3.5 basis points at 2.222%. The 30-year Treasury bond was up the same at 3.350%. The yield moves in the opposite direction to price and that means that this is happening just moments before the auction of benchmark 10-year notes takes place.  Investors are jittery and that’s showing through. The volatility is still there and the worry is not being calmed down by the Federal Reserve’s lack of decisive action. Experts say that while the yield for 10-year notes is still under 2.25%, the demand won’t show.

Right now, it looks like we have been doing pretty much everything to make the world a safer place in terms of economic strategy. At least, that was the idea. We have tried (hopelessly some might say) to make the world a place in which everyone gets the benefits of the market and economic strategy that is played out. But, right now, it looks like the bonds that were intended to hedge positions in the market and save the economies from debt-ridden strife, may just now be the cause of the increased debt we will suffer in the future. A paradox? Yes, but where’s the grandfather that started it all?

Will today’s benchmark 10-year notes auction attract buyers?

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