Bond newbie, my apologies. Were I managing corporates now, I would not be aggressive yet. Too many things are breaking that don’t break in ordinary recessions. I do like the yield on TIPS now, and would be overweight, but not max overweight. I would be equal weight on credit now, there is enough spread to make things interesting.

David Merkel submits: The Euro has been falling recently versus the Dollar.  Why?  There have been many theories proposed, but I want to offer my own theory this evening.  Fiat currencies are political creatures, and are only as strong a…

What does this mean? That FDIC won’t insure these accounts? What are you talking about?

PS: Beautiful day on the hill

But you just had two posts in the last week crowing about buying yieldy, long-duration financial bonds back in 2001-02. What’s changed?

And if you like TIPS, do you really think the real rate is attractive?

5 yr conventional Tsy = 3.06%
5 yr TIPS = 1.86%
5 yr TIPS coupon = 0.625%
So inflation expectations are 3.06-1.86=1.20%
1.20% – 0.625%= 0.575% real return

I’m just a bond newbie, so maybe I’m doing this wrong, but I’d sooner go with long conventional Tsy than TIPS here. Long Treasury yield are a classic lagged indicator, and inflation is clearly headed down in the short and intermediate term. I am confident of this because the bailout plan is not being financed with seignorage, but with further borrowing, which will retard future growth and therefore future inflation. Demand for Treasurys is extremely high, so supply concerns are overdone.

What I don’t get is why the arbitrage opportunity between FNM and FRE agency bonds and Treasurys is so wide….

1. This whole mess is the consequence of too much borrowing. The government’s solution is to get people borrowing again–interrupt the healthy deleveraging that is happening in the consumer sector.

2. Hopefully, if banks begin lending again, they won’t resume the lax lending standards that they had over the past 5 years. This implies that people will need to come up with down payments. According to the data, Americans generally don’t save and haven’t saved over the past several years.

3. If the government manages to stop the credit market dislocation, that still doesn’t address the broken consumer problem. This year, we have seen the consumer weaken considerably. We have also seen rising unemployment that has yet to hit consumer spending. Corporate earnings, in my opinion, decline dramatically from here and we will see a bankruptcy crisis outside of the financial sector as consumer cuts back on discretionary spending.

Now, you kind of joked above and I’ll joke here. Let’s have a trickly up bailout. The 600 stimulus checks we all got earlier this year cost 150 billion. At 700 billion, we could all get 2800 dollar checks. The way Americans manage their money, it would all end up in the bankers’ hands eventually. Why not have a trickle up bailout, which would be more palatable to Americans (who oppose this bailout more decisively than they elect a presidential candidate every 4 years).