* This post was written in 2011 before Mr. Roche founded Monetary Realism, which was formed due to several disagreements Mr. Roche and many other former MMT proponents had with the school of thought.  For more info on the difference in views please see here.  For more on MR’s views please see here.


The US Treasury bubble continues to collapse HIGHER….If you bought long bonds exactly 12 months ago you have achieved a total return of ~5.5%.  That’s not world beating, but it’s certainly not bad.  What’s been so interesting about the US Treasury market, however, is that yields simply refuse to surge higher.  Supposedly, there is high inflation.  Supposedly, there are bond vigilantes just waiting to take out the USA on a slab and dump her in the ocean of default.  Supposedly, we have a fiscal problem that will render us the next Greece.  Supposedly, we are “running out of money”.  Of course, none of this is really accurate and the US Treasury market is reflecting that reality.

In a death march similar to Japanese Government Bonds in the 90’s, US bond investors continue to try to call the US Treasury market a “bubble”.  Some readers might think I spend most of my time trying to slay bubbles (given the recent surge in hate mail regarding my silver bubble call), but I have spent quite a bit of time trying to quell fears in the US Treasury market as well.  After all, this bubble talk in treasuries has been going on for the better part of the past 5 years+ and an odd thing keeps happening – the bubble callers keep looking back in awe as yields simply refuse to surge as so many have predicted.

Of course, anyone with a sound understanding of our monetary system (see here for a guide) can see that there is no such thing as bond vigilantes for a nation that is the sovereign issuer of its currency in a floating exchange rate system where the natonal debt is denominated in a currency it can create.  You also understand that it is nonsensical to argue that the USA is remotely similar to Greece, a household or a business (all of whom are currency USERS).  And most importantly, you see that bonds have no relationship to the nation’s financing operations.  The only reason yields would surge is if the country were in fact suffering high inflation or at risk of hyperinflation.  The treasury market is sending a loud message, however – those calling for hyperinflation, default or even high inflation are dead wrong.  The JGB death march (now the UST death march) continues…..


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • El Viejo

    That ‘eternal bear’[sarc] Shilling was right again! I guess I should sell my bonds now.

  • David

    It can’t be a bubble if you are chasing a return of 3.17% (10yr yield). Everyone worries about who will buy bonds when the Fed steps out, this should hardly be a concern just like it wasn’t a concern last time when they stopped and the 10yr took a run at 2%.

  • http://imperialeconomics.blogspot.com/ Nemesis

    If the historical self-similar pattern repeats for debt-deflationary secular bear markets since the 18th and 19th centuries, including the avg. 10-yr. real yield for US gov’t paper, the 10-yr. US gov’t note yield will fall to the mid-1% area, with the 30-yr. falling below 3%.

    This will likely occur with periodic price deflation along the way, as well as little or no nominal GDP growth and the continuing deceleration to deeper negative rate for the avg. 10-yr. real per capita GDP.

    Thus, cash and Treasuries will trounce stocks, junk debt, and commodities on a net return basis over the next 20-30 months, and do no worse against stocks and commodities on an avg. peak-to-peak basis from today’s yields and stock and commodities price levels through the end of the decade.

    In the months and years ahead, we will look back at ’09 to date as a Fed- and leveraged-induced speculative blow-off echo bubble coinciding with the onset of the post-Oil Age epoch, the worst 5- and 10-yr. avg. returns for stocks, and the most negative drag effects of Boomer demographics taking hold along with a mass-social deflationary mindset.

    Watch the critical weekly close level of SPX 1328 to be broken below tomorrow as possible weekly confirmation of a seasonal (10%+ correction) or cyclical (30-35%+ decline) top; however, a May close below 1286 would be required to imply the monthly confirmation of a cyclical (major) top with a possible bear market target area of 866-930 (or primary wave down of a multi-year bear into ’13).

    Silver’s textbook hyperbolic blow-off trajectory accelerated at second- and third-order Fibonacci scales from $19 and $11. All such bubbles burst and retrace the entire hyperbolic blow-off price gains, implying a violent reaction rally from the $30-$35 range back to as high as $40-$45, and then “the” crash to $15-$20 to as low as $11-$12 (and the ’08 low or lower if the US$ rallies strongly to near par).

    The scale of the hyperbolic blow-off implies that the aforementioned price lows for the “anti-bubble” regime could occur in as few as 4-6 months.

    Thus, be prepared for EXTREME volatility and limit up and down prices for commodities and eventually stocks (occurring increasingly in after-hours and pre-market trading).

    Let’s see if HFT, the banksters, and broke-ers survive the next series of hyper-volatility flash crashes and vertical meltdowns of the next bear market.

  • Sanford

    maybe the “bond vigilantes” aren’t interested in fighting a market that has $5-8 B pumped into it every day and are just waiting patiently for that to end, which it theoretically will one day hopefully. i’m sure they’re happy to wait while prices get goosed higher and higher.

    or maybe they’ve realized there’s a TON more money to be made in equities and commodities. but eventually that may change ..if it hasn’t already.

    i don’t know. anyone want to lend me a couple bucks for 30 years at 4.33% in 2011-dollars?

  • http://www.pragcap.com Cullen Roche

    Just like what happened when QE1 ended, right? :-)

  • Gatti


    Sounds a lot like Rosenbergs bullish call on the power of convexity. Yield flattening from 3% to 2.75% is a preatty powerful total return.

    Maybe Rosenberg is bullish on making money and bearish on poor risk management of the QE2 whores. How’d the oil/silver thing work out for everyone.

    Oh yeah everyone timed it perfect and sold last Friday. my bad.

  • prescient11

    TPC, I have a strange feeling you’re going to be eating these words. It’s hysterical really. But what a great, great time to buy silver, silver miners, and all associated commodities.

    You buy tbills, I’ll buy what I just said. See ya in a year my friend…

  • JWG

    The end of QE2 is beginning to look a lot like the end of QE1. Once the liquidity push ends, powerful deflationary forces once again start to take over. If QE3 is the reply to deflation, faith in the dollar may crash and then we could have a disorderly decline if the madness of crowds swamps the rationality of MMT and TPC’s “duration swap” analysis of QE. The Fed issues a fiat currency that in theory is infinitely elastic; in reality there are many variables in the equation and mass psychology is a big one.

  • Mark

    Cullen – I am a little surprised that you both do not acknowledge Gary Shilling for repeatedly telling people that this would play out exactly as it is but also that you do not include him on your list of “Must Read Market Practitioners”.

    I have followed Dr. Shilling’s advice on Treasuries for years – very profitably, a nice balance against the winds of Wall Street.

  • http://www.pragcap.com Cullen Roche

    I love Shilling’s work. No disrespect meant by leaving him off.

  • Ivan

    Thanks Cullen for contributing to a wider understanding of modern money. I believe muppets such as Bill Gross will be proved wrong on their Treasury call -yet again.

    I genuinely believe the people won’t be free until they really get the monetary world they live in. That day they will be able to force their elected representatives to actually use the tools at their disposal and stop the scaremongering nonsense.

    Very interesting that “the market” (or at least cnbc) seems to be populated by such muppets but in the end price action in Treasuries reflects underlying realities.

    I still struggle to fully understand it. After all, the hyperinflaion story was also ludicrous and yet precious metals did go through the roof.

  • Witt


  • Par Contre

    The Japanese deflation has been grinding away for two decades now, so in my humble opinion it is premature for anyone to state with absolute conviction how this story will end.

    The common thread seems to be an economy trying to work off a mountain of bad debt, and a central bank that has put the pedal to the metal in an attempt to negotiate its way through the crisis. But the bad debt is emblematic of capital that has been squandered, of losses that have been incurred. By creating a climate of easy money, the central bank causes fresh capital to be diverted toward servicing the bad debts that cannot be repaid. The diversion of capital away from productive endeavors leads to a decline in economic growth, which exacerbates the problem of bad debts.

    In the long run, the only way for a society to successfully navigate this financial crisis is to rebuild its stock of capital and increase its rate of economic growth; the only way to do that is to increase its rate of savings and channel those savings into the most productive investments available; and the only way to do that is by allowing interest rates to rise to their market equilibrium.

    That higher interest rates would bankrupt many debtors — even sovereign borrowers — is simply the medicine that must be swallowed if the patient is to survive. The path of easy money, and the crushing of yields, will only prolong the agony and lead to an eventual heart attack. Consider for a moment how pension funds, currently expecting to achieve an 8% return on their investments, will fare as their returns continue to grind lower and lower, and you begin to get a feeling for the scale of the impending disaster.

    The Fed can, and probably will, continue to hold its benchmark rate at zero and engage in quantitative easing ad nauseam. And yields will continue to grind lower and lower as the economy is crushed by the mountain of bad debt. But eventually the system will suffer a heart attack in the form of a total and absolute collapse of the currency.

  • Edward

    I would be careful with this call. The tape has changed. Whereas bonds would bid along with equities the past month, the last trading days has seen the natural inverse correlation play out. So if stocks rally, bonds will drop, yields will rise. The jobs data on Friday is the turning point.