Time To Abandon The Bond Ship?

With the debt ceiling issue still unresolved, bonds have been reacting as expected, yields are up and values down.

From Bloomberg:

Treasury 10-Year Note Yields Rise to Two-Week High on U.S. Debt Deadlock

Treasury 10-year note yields touched a two-week high after speeches by President Barack Obama and House Speaker John Boehner showed they still disagree on how to raise the borrowing limit.

Yields on two-year notes fluctuated after matching a two- week high before today’s $35 billion auction of the securities. The difference between yields on 10-year notes and inflation- linked debt reached to the widest since May on concern the U.S. credit rating may be lowered.

It cost more to insure U.S. Treasuries for one year than for five years for the first time, as investors anticipated that a failure to raise the debt ceiling will prompt rating companies to declare the nation in default.

One-year credit-default swaps spiked to a record 80 basis points today, according to BNP Paribas SA, up from 46 basis points on July 22. The contracts now exceed five-year swaps by 23 basis points. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

The dollar fell to a record low against the Swiss franc and approached its postwar low versus the yen as Obama and Boehner dueled over the budget limit. Spot gold climbed to a record high $1,624.07 an ounce yesterday.

One of the problems that has appeared recently, is the decreased demand for long term US debt which is being swapped for short term debt as this chart shows:

Given a rumor that a large trade has been placed against 10 year treasuries, it will be most interesting to see how this plays out in the markets.

The bigger concern is the move in Credit Default Swaps. This cost to insure against default is an excellent indicator of risk within the bond sector. While I remain fairly confident a debt deal will be reached soon, it is indicative of the large problem of a debt that has accumulated to unrepayable proportions.

I remain long physical gold and farmland, and continue to jump in and out of the market when the right buy and sell signals present themselves.