"Among the weblogs, the best coverage of the Churchill controversy has been in View from a Height..." -Dave Kopel, Rocky Mountain News

"In Colorado, the Rocky Mountain Alliance of Blogs is covering the hot GOP primary between beer magnate Pete Coors and former Rep. Bob Schaffer with a great deal more insight than the Denver newspapers." -John Fund, OpinionJournal.com

"The Rocky Mountain Alliance offers the best of what the blogosphere has to offer." -David Harsanyi, Denver Post
Joshua Sharf

 notify list
to receive email when this site is updated, enter your email address:
 recent posts
Blogging 27 entries
Book Review 13 entries
Business 109 entries
China 2 entries
Colorado Politics 57 entries
Decision 2008 1 entries
Finance 8 entries
Flying 3 entries
General 86 entries
Higher Ed 28 entries
History 2 entries
History 2 entries
Israel 16 entries
Jewish 15 entries
Judicial Nomination 6 entries
Katrina 13 entries
Media Bias 7 entries
Movies 8 entries
Photoblogging 2 entries
Road Trip 5 entries
Social Investing 1 entries
Vote Fraud 7 entries
War on Terror 70 entries
my other blogs
Three-Letter Monte
Oh, That Liberal Media
Rocky Mtn. Alliance

Friends of the Alliance

other blogs
One Big Swede
American Thinker
Meryl Yourish
NRO Corner
Little Green Footballs
No Left Turns
A Constrained Vision

business blogs
Carnival of the Capitalists
Cold Springs Shops
Commodity Trader
Coyote Blog
Different River
Fast Company Blog
Financial Rounds
Freakonomics Blog
Management Craft
Trader Mike
Carnival of the Capitalists Submission

business data
Inst. Supply Mgmt.
St. Louis Fed Economic Data
Nat'l Bureau of Economic Research
Economic Calendar
Stock Charts
colorado blogs
Boker Tov, Boulder
Colorado Pols
Jeff Sherman

<-?Colorado BlogRing#->

sites, not blogs
Thinking Rock Press
 help israel
Israel Travel Ministry
Friends of the IDF
Volunteers for Israel
Magen David Adom
 1939 World's Fair
1939: The Lost World of the Fair
The New York World's Fair: 1939-1940
The Last Great Fair by Jeffrey Hart
Iconography of Hope (U.Va.)
Images From the '39 Fair
 google ads
Powered by
Movable Type 2.64

August 15, 2005

Bonds, Future Bonds

Great. Just when you thought it was safe to go back in the bond market. The Wall Street Journal has covered this story for the last couple of days, but there's kind of a technical component here, so hold on. (Hugh, I'll try to explain it so even you can understand. Stop laughing, Duane.)

It turns out that there's an ongoing, periodic liquidity crisis in the 10-year Treasury Bond Market. Why does this matter? We'll get to that in a moment, but first, let's explain how this could possible happen in someplace where the word "republic" isn't preceded by the name of a fruit.

The problem is a shortage of actual bonds available to deliver when futures contracts close. It came to light in June, when a huge bond fund, PIMCO, found itself with very, very large position in 10-year futures contracts. Normally, it has no interest in taking delivery of these bonds, so it would just sell the contracts to close, and buy September contracts to replace them. But the September contracts were expensive, so PIMCO decided to hold onto the June positions, and go ahead and take delivery of the bonds. (They informed the Chicago Board of Trade of this, in order to avoid the appearance of manipulating the market.)

Here's the problem: there aren't enough bonds to fill the deals. Bond futures holders normally only take delivery about 10% of the time. (In fact, the CBOT, when it discovered the problem, implemented a rule that futures holders couldn't ask for more than 10% of bond in delivery, immediately driving down the price of those September futures and costing traders even more money.) So when PIMCO signaled that it reallly was going to expect those bonds at the end of June, it set off a scramble to find bonds to deliver.

There's another bond market that doesn't get as much play in the press - the repurchase, or repo market. That market is basically a short-term lending house for bonds, much like your credit card is, or should be. Naturally, with all these 10-year bonds out on loan, PIMCO's sudden need for bonds created a shortage, or squeeze, in the repo market, too.

This means a couple of things. First of all, look at the 10-year interest rate.
There's a noticeable, half-point drop bottoming out at the end of June. But there's still plenty of downward pressure on 10-year rates, because everyone knows the same thing is going to happen in September. People are holding onto those bonds, because 1) they want to be sure they have enough to deliver, and 2) they expect the price to rise, and thus the yield to fall. It also means that for the time being, the repo market is likely to be less liquid, putting downward pressure on short-term rates.

It's likely that this will work itself out to some degree, but it also means that the massive foreign appetite for our Treasuries is responsible for that flattening yield curve everyone's worried about. This time, though, it may not presage a recession.

Posted by joshuasharf at August 15, 2005 04:58 PM | TrackBack

A Civil War

Supreme Command

The (Mis)Behavior of Markets

The Wisdom of Crowds

Inventing Money

When Genius Failed

Blink: The Power of Thinking Without Thinking

Back in Action : An American Soldier's Story of Courage, Faith and Fortitude

How Would You Move Mt. Fuji?

Good to Great

Built to Last

Financial Fine Print

The Balanced Scorecard: Measures that Drive Performance

The Balanced Scorecard: Translating Strategy into Action

The Day the Universe Changed


The Multiple Identities of the Middle-East

The Case for Democracy

A Better War: The Unexamined Victories and Final Tragedy of America's Last Years in Vietnam

The Italians

Zakhor: Jewish History and Jewish Memory

Beyond the Verse: Talmudic Readings and Lectures

Reading Levinas/Reading Talmud