Bonds Headed Lower
Research for Online Investors

by John Dalt

3/24/09

A week ago today TLT closed at 100.56.  This ETF prices the value of the principal amount on existing 20-year Treasury bonds.  It trades higher as interest rates fall, and lower as interest rates rise.

Last Wednesday the Fed announced that they would buy up to $300 billion in treasury bonds in the next six months.  March 19^th (the next day) the TLT rose as high as $108.07!  Today the TLT is trading for $102.32; it seems that $300 billion does not buy much anymore!  After a $300 billion commitment, interest rates are headed higher.

Wire Services carried the news at 1:30 pm today that the Fed will enter the market tomorrow and TLT moved higher $1.00 It will be interesting how the auction goes tomorrow.  How much will the Fed have to buy to keep rates down?  They might go through the $300 billion faster than they planned.

China’s central bank chief wants to see the dollar replaced as the world’s reserve currency by the IMF’s Special Drawing Rights (SDR).  This would allow each country’s currency to be priced against the SDR, not the dollar.  This proposal would affect our country dramatically.  As the ‘worlds reserve currency’ our dollar, and our economy, enjoy unique pricing power and stability.  There is a short article about this, you may find of interest.

The ramifications of U.S. stimulus spending and lack of budget discipline are causing concerns around the world.  If the dollar loses status as the worlds ‘reserve currency’ the Fed will not be able to print money for ‘quantitative easing’.

The market lost ground today, but not enough to destroy the 500-point gain from yesterday.  805 on the SP500 held, this would portend an up day tomorrow.  There are some voices questioning the “New” Geithner plan.  As I pointed out yesterday, the prices paid for securitized mortgages may not increase with this plan.  Investors can still incur losses.  There is also a concern that if the private investors actually make money, they may have to endure a congressional gauntlet as profiteers.

Treasury Secretary Geithner wants the authority to take over businesses that he decides may pose ‘systemic risk’.  Wow, Oh! Bama wants the authority to take over insurance companies, or Dairy Queens.  The last one may be a stretch, but I would consider it ‘systemic’ if my local Dairy Queen closed.

I spent part of this afternoon with an old friend, who is having trouble with his business.  The economy is slow, his business is slow, and cash is short.  I suggested some strategies to increase cash flow, collecting late accounts, taking deposits at start of projects, etc.  I suggested going to a shorter workweek for employees, but he may have to lay some off.  It is tough when you have worked for years to build a business, and are caught in the vice of declining sales, and short on cash.  Hard decisions have to be made to ensure you survive until economic conditions improve.

Our Government has not learned what each of us knows!

There is only so much milk in the cow! 

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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