Big Treasury News!!!

Why the World’s Largest Bond
Fund Is Dumping Treasuries

Also In Today’s Letter….

• Why the Bond King Doesn’t Trust Treasuries Anymore
• An Incestuous Circle of Debt
• Four Things You Need to Be a Savvier Trader
  

Good day…and a Terrific Tuesday to you!

Earlier this month, the world’s largest bond fund, PIMCO announced they are curtailing their Treasury buying for 2010.

For those new to the class, PIMCO is the “Bond King’s,” Bill Gross’s fund. And if you don’t know Bill Gross, Morningstar just named him “Manager of the Decade” for bond mutual funds in mid-January. And he definitely deserves that title.

Now back to the PIMCO story…

This should have been BIG news, but for the most part, everyone (read: currency traders) were asleep at the wheel. Either that, or they really have drunk the Kool-Aid that the media has been passing out, and truly believe the U.S. recovery is in place.

After all who cares if the world’s best bond investor is dumping Treasuries when it’s all seashells and balloons for the U.S. economy from now on?

Frankly, I don’t buy that for a second.

The fact that smart guys like Bill Gross are selling Treasuries just gives me another reason to believe the Treasury market is inching closer to bubble territory…and anyone buying long-dated Treasuries is just asking for trouble.

Why the Bond King Doesn’t Trust Treasuries Anymore

Of course, Bill Gross and the rest of the guys running PIMCO don’t believe this recovery hogwash. Neither does the 2nd largest bond fund in the world, Kokusai Global Sovereign Open. They just announced that they are going to shun U.S. Treasuries in 2010.

Now why would these bond fund managers all dump their Treasuries? Here are the facts folks…

The U.S. has to issue $1.9 Trillion in new Treasuries in 2010 just to finance the budget deficit. Read: That’s almost $2 Trillion in new Treasuries. And that’s just to finance the budget deficit. That ridiculous $1.9 Trillion figure doesn’t even cover other new expenses, like Obama’s healthcare plan (if that should come back).

You have to ask yourself this question… Who will buy $1.9 Trillion worth of Treasuries this year? Now you may be thinking, “well, we never have had problems finding foreigners to buy our debt before.” If so, you’re not entirely correct.

On the contrary, it was extremely difficult to get foreigners to buy our Treasuries in 2009. In fact, of the $1.5 Trillion of Treasuries issued in 2009, foreigners bought less than $400 billion. U.S. institutions bought the rest.

Now, how did they do that? Oh! You haven’t heard about this? Well sit back and get ready to gag…

An Incestuous Circle of Debt

Remember the Fed’s Quantitative Easing program? Well, during 2009, Financial Institutions sold their toxic bonds to the Fed, then took the Fed’s cash and reinvested it into Treasuries.

It all sound a little incestuous doesn’t it? Well, the party ends in March of this year. That’s when the Fed’s Quantitative Easing bond buying program will supposedly end (assuming they end it on time as they have announced).

So, the Financial Institutions won’t be selling their toxic waste bonds to the Fed anymore. The Fed also won’t be funding the Financial Institutions’ buying of Treasuries after March of this year.

That will leave Treasuries hung out to dry. And with the number 1 & 2 largest bond funds in the world not buying Treasuries, we’re going to see some major damage to the values of outstanding Treasuries.

You see, if no one shows up to the auction window to buy Treasuries, then the U.S. Treasury Department is going to have only two choices….

First, they can raise interest rates aggressively to make the Treasuries more attractive. The existing Treasuries lose value, because as interest rates rise, the price of the bond goes down.

Price and yield have an inverse relationship with bonds. And that makes sense, given the old bond yields a certain amount, and the new bond yields always yield more. Which one would you want to buy? The new bond right? That cuts the value of all existing bonds.

But in doing so, they will also cause Treasury issues to take huge losses and deep-six the so-called “recovery” here in the United States.

Or, the second choice is to allow a general debasement of the dollar.

Unfortunately, I believe the government will have to do a little of both! And that’s why, these two largest bond funds in the world, are shunning U.S. Treasuries in 2010.

It certainly looks to me as though, they made the right decision. I would suggest you follow their lead this year.

Let’s get out of here and a have a Terrific Tuesday, shall we?
Chuck Butler

P.S. As the U.S. Treasury inflates the market with more and more debt, we inch closer and closer to the Treasury Bubble popping. Now of course that’s bad news for Treasury holders. But it’s a great opportunity to invest in gold, oil, and several other assets that soared five and six-fold the last time we had a Treasury Bubble pop in the United States. Get the full story on how you can bank on this rising trend