Monday, May 14, 2012


I was doing market research this morning and I found yet another reason to dislike the Federal Reserve (yes, I know they have social media monitors logging in my rants).  As you examine your bank accounts, savings accounts, and all other "safer" investments we should be prepared to thank the entity that assists us our efforts to move backward away from any realistic investment goals.

Here is a real advertisement from ALLY Bank promoting a very wonderful 1.45% yield on a 4 year CD.  WOW!!!  And to think you only have to invest your money with a bank that was formerly GMAC that owned ResCap, an entity which filed for bankruptcy in the last couple of weeks.  Don't forget though, those CDs are 100% guaranteed by the FDIC so no worries!!

ZIRP is how we can thank the Fed!  Our liquidity at all costs and zero interest rate policy is absolutely the reason we can lock our money away for 4 years and receive almost nothing.  Thank you Uncle Ben!

In comparison we can buy short dated corporate bonds and earn only slightly better if we go do the credit curve and buy riskier names.  The range I am seeing for lower quality investment grade names ranges from 1.4% to 4.0%  Still, that is disgusting considering the risk you need to take to get those rates.

Unfortunately to keep the ponzi scheme going, it can't.  If the Fed lets rates rise, we can't afford it as a nation.  Ask the Japanese how that 10 year 1% bond helps retirees, I'm sure they love it!

Well, JPM seems to be getting a little news on its "Hedge Book that looks and acts like a Prop Trading Desk".  I find this story to be very entertaining as they were short long dated investment grade bonds, betting that price would go down and yields up.  It seems as though JPM's Hedge Book is so large that it was moving markets as it bought and sold positions (or in credit terms he sold protection on the IG9.  In addition, it seems as though the book was thrashed as several issues combined to tip the market off that there was a massive player in the markets.  As JPM's desk sold protection its daily adjustments were so large that it dislocated normal correlations of the investment grade market to the S&P500 equity market.  Those evil hedge funds began to see the divergence in markets and started trading against the mis-allocation in pricing, betting that it would come back into alignment.  In the midst of these trades, long term treasury rates fell as concerns in Europe mounted, creating an even more trouble set of circumstances.  Since the book is so big, JPM was altering credit markets in their attempts to hedge and position the book!  If JPM is still in it's positions, it is getting hammered.  In a conference call, it was released that the DV01 or Dollar Value of a 1bps move for the book was $200 million!  Since the the early rumors broke on this story back in April, the 9 year investment grade yield curve has moved out 25bps which could suggest that there really is a staggering $5 Billion loss (if they still have those positions on).  Pretty nasty loss for a risk controlling desk isn't it?

As I've written for almost two years now, investors in bonds can only be in short dated bonds.  If a person desired longer maturities they certainly shouldn't be buying bonds now as the only place for rates would be up (in sometime in the future).  Given the problems we are seeing with JPM and long dated credit, we all are left saying, "Thank you Fed, may I have another!"


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at