E Fed Weakness, Future Insatiable Bond Demand With Short Supply

The Federal Reserve and many central bankers are sincere about saving America from negative interest rates caused by derivatives markets' demand for long bonds. But the Fed could not save us from the housing bubble of the last decade and won't likely save us from negative interest rates and a powerful push towards the cashless society.

Supply and demand are key to understanding the long bond market. And that supply and demand may result in profound changes in our economic system, not for the better.

Long bond markets are likely rarely manipulated, as stocks are when corporate buybacks reduce supply of stocks available. There has been an accusation made that banks are trying to push yield up and price down, because they want the best deal for their insatiable appetite for bonds.  Manipulation of auctions to raise yield seems counter intuitive. You would think that all those warnings of yields rising would make banks want to avoid doing illegal things to make them rise, if they are going to rise anyway.

I believe that the banks know otherwise, that the yields are headed downward, and that the price of bonds they want to buy will go inevitably higher. That is why, if the allegations are true, that banks seek to push prices for bonds down.

While I am not permitted to link to it, Blackrock has a study out which was not to be used by the retail investor, but only by institutions. I don't plan on using it, but clearly the demand for bonds in that study far exceed the supply through 2016. Blackrock estimates that in 2017, that would change, but it is only an estimate, and it is only for the regulated asset owners who often times are forced by their rules to keep buying.

In the section of the Blackrock pdf. report, titled After Liftoff, by Peter Fisher, there is a chart that shows demand from regulated asset owners to be 5 trillion dollars and supply to be 5.8 trillion dollars for 2017. So, for regulated asset owners there will be a .8 trillion dollar oversupply as an estimate only from Blackrock. Previous to that there is a huge under supply.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Scott Matusow 4 years ago Contributor's comment

This could explain those Jade Helm exercises because we can be certain to expect civil unrest if fed tries to go cashless. There is nothing I would put past crony academic ivory tower elites.

Gary Anderson 4 years ago Author's comment

I certainly hope it does not go that far, but they appear serious with the endless articles pumping the cashless society. No man can count the articles that have been written touting it! It is troubling to contemplate.