The Fed Supports Mortgage Backed Bonds With QE 2 … The ECB Supports European Banks With Peripheral Bond Purchases

I … EuroIntelligence in article Eurozone Bond Spreads Reach New Record relates: Hardly a day goes by without a new record in eurozone bond spreads. Yesterday, Irish and Portuguese spreads reached their latest all-time highs, according to Reuters, as investors are beginning to catch on to the idea that Germany’s proposal for a permanent crisis resolution regime make a default of peripheral European sovereign very likely. The situation is further aggravated by a political impasse in Dublin ahead of a budget vote. A Portuguese debt auction today has also unnerved investors. The article quotes a Societe Generale strategist as saying: “With this kind of talk from Germany, we are heading towards putting some bond markets into a prolonged period of cold storage, à la Greece.” Note also that the euro is weakening again, as the European bond market crisis returns. ( I report that the Euro, FXE, closed yesterday November 9, 2010 at 137.27; and that the Euro Yen carry trade, that is EUR/JPY, can be followed as FXE:FXY)

EuroIntelligence goes on to report that Reuters Breakingviews says  that the ECB can’t print eurozone into solvency … Can the ECB solve the peripheral eurozone solvency problem through the printing of money? Reuters Breakviews asks this question whether the eurozone is heading for a Latin American debt crisis. “The problem of the euro periphery is that the market isn’t sure Greece, Ireland, Portugal and Spain are financially viable. When the ECB buys euro-periphery debt it is therefore stepping in where investors fear to tread. What was intended as a short-term Greek crisis palliative, risks becoming the monetisation of periphery deficits,” it writes. The solution is transparent help from the IMF and the EFSF, not the printing presses.

II … The US Federal Revere supports mortgage-backed bonds with QE 2 … and in similar vain … The ECB supports European Financial Institutions, EUFN, with peripheral bond purchases.

Yesterday, November 9, 2010, I wrote that Interest rates moved higher.

Acting on the words of Richard W. Fisher, in speech entitled The Recent Decisions Of The Federal Open Market Committee, delivered before the Association for Financial Professionals in San Antonio, Texas November 8, 2010, who said in lengthy discourse:  ”For the next eight months, the nation’s central bank will be monetizing the federal debt”, the bond vigilantes, called US Interest Rates higher across the board:

$TYX: Interest on the 30 Year US Government Bond — Rose to 4.25%

$TNX: Interest on the US Ten Year Note — Rose to 2.66%

$UST2y:  Interest Rate On The 2 Year US Government Note — Rose to 0.46%

Bond vigilantes have reason to call interest rates higher on European Financial Institution Bonds, that is to call European bank bonds, higher as Abigail Moses, of Bloomberg in article Spain Leads Surge in Sovereign Credit Risk to Record in Europe reports:  Spain, EWP, led a surge in the cost of insuring European government debt to a record on concern the region’s peripheral nations will struggle to cut budget deficits and repay debt. Credit-default swaps on Spanish government bonds jumped 10.5 basis points to 275.5, an all-time high based on closing prices, according to data provider CMA

This resulted in bonds falling lower.

World Government Bonds, BWX, Emerging Market Bonds, EMB, US Municipal Bonds, MUB, California Municipal Bonds, CMF, US Government Treasuries, TMF, UBT, ZROZ, TLT, BAB, IEF, IEI, Long Term Corporate Bonds, BLV, World Corporate Bonds, PICB, Mortgage Backed Bonds, MBB, and Total Bonds, BND, fell lower: the world has passed through peak credit. 

World Government Bonds, BWX

Total Bonds, BND,

Chart of TLT. US Government Bonds were near the top of the investment loss list today.

Chart of Build America Bonds, BAB, shows the Build America Bonds to be a failed investment.

Chart of Long Maturity Corporate Bonds, BLV, the cost of business borrowing increase dramatically today, thanks to Ben Bernanke’s QE2.

The end of credit has commenced with the world’s interest rates now moving higher and as no further gains can be achieved from investing in debt as the 30 10 US Sovereign Debt Yield Curve, $TYX:$TNX, has steepened to the fullest point of gain. All further steepening will continue to create an investment demand for gold and the further steeping that is coming will destroy bond wealth.  Yes the yield curve may flatten some, but there will be no longer term flattening of the 30 10 Yield Curve.   

The fall lower of Junk Bonds, JNK, and the Leveraged Buyouts, PSP, suggests that peak investment liquidity has been achieved.

Mortgage REITS, REM, fell 0.7% lower; QE 1 and QE 2 has been all about preserving the value of the mortgage-backed bonds held by Mortgage REITS and banks through monetization of debt, that is simply printing money out of thin air to buy US Government debt in the marketplace.  

I add today, that the any issuing of euro-bonds by the EFSF would only be hyper monetization of debt and the periphery debt problem has become so ingrained and systemic that it has gone beyond the point where any IMF intervention would be helpful.

III … Out of chaos will come order.

I believe that out of intensifying bond deflation by bond vigilantes calling sovereign debt and bank debt interest rates higher, and greater competitive currency deflation at the hands of currency traders, the seigniorage of the European periphery countries will fail, and that they will default on their sovereign debt.

 Then I believe a Global Seignior, will arise and institute unified regulation of banking globally, this as referred to, in the James Politi and Gillian Tett Financial Times article, NY Fed Chief In Push For Global Bank Framework, and that the Seignior will oversee all matters of debt and credit, and implement a universal currency system, a global currency, that will first be used by Portugal, Italy, Ireland, Greece and Spain, as they will have lost their sovereign debt seigniorage and the ECB will have stopped buying their debt.


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