The following is a newsletter article from Larry Levin of www.secretsoftraders.com and it touches on the ice berg of a major issue.  Some of this is opinion, although opinion from a successful trader who understands the markets.  That said, always read between the lines as numbers can be made to look pretty much any way the person making the argument wants them to look.  Yet the numbers themselves are there pointing to where we are, and they can’t be ignored.

Good article, and I agree with it.  So here is the piece from Larry Levin’s Nightly Newsletter

Bond Market to Feds: Drop Dead!

Today’s bond market action reminded me of the famous 1975 Daily News headline, “Feds to New York: Drop Dead.” At the time the federal government decided to reject a request for a NY city bailout, which prompted the headline.

However, times are different today: nobody is allowed to fail. Chrysler was allowed to keep its $11.4 billion “bailout” (that’s right US taxpayer – you were robbed!) and GM is said to be on the docket to receive ANOTHER $50 billion bringing its total to $69,400,000,000.00. Do you think GM will repay this money? Do you think AIG will repay? What about Shitigroup and Bank of America?

By the way, as of yesterday GM was worth about $800 million. Uh-huh, we’re giving GM $69.4 BILLION when its current net worth is almost 87 times less! What the hell kind of math is used to justify such nonsense? Oops, my bad – that’s Washington DC math.

Well, when you throw in the assured future handouts to insurance companies, commercial real estate firms, government run healthcare, State handouts, “free” college educations, etc the bond market is saying – no thanks. All of these so-called freebies are “budgeted” at today’s interest rates.

Like the fools that they are in government, they extrapolate funding this madness to infinity with ultra-low interest rates but forget that the bond market does not have to play along. The bond market is bigger than the President. The bond market is bigger than Tax-Cheatin-Timmy at Treasury. And although Helicopter-Ben doesn’t know it, the bond market is bigger than even the Federal Reserve.

Today the bond market may have said to all the aforementioned: DROP DEAD!

With today’s price collapse in the 10-yr Notes and 30-yr Bonds and commensurate yield spike, spreads widened. The 2yr/10yr spread is now at the widest spread ever. The 2yr/30yr spread is now just three basis points shy of its all time 1992 record. The 30-YR fixed mortgage rate on the eRATE real time mortgage quoter spiked a huge 28.2%! Yesterday it was quoted at 5.08% and today was quoted at 6.52%! Surely this was a knee-jerk reaction and will fall somewhat, but it should be a wake-up call.

So what happened? Today’s 5-YR Note auction went well – better than expected – and the bond market still crashed. Uh-O, good news and the market still drops thus increasing interest rates? That’s bad and why I say the bond market is getting tired of the bailouts. Remember, GM is only days away from filing BK and therefore another MASSIVE cash infusion.

Tomorrow brings us a 7-YR auction and thus perhaps more fireworks – or not. You see, it is the 7-YR that many believe is the cutoff between where the foreign central banks will slow or stop buying Treasury’s IOUs. The US is beholden to the kindness of foreign banks of China, Saudi Arabia and others. At the moment they seem willing to buy short term IOUs, but not the longer term junk, which is driving up interest rates.

Question: If long term rates continue to rise while Helo-Ben is powerless to stop them, how much of a so-called recovery do you thing there will be?

The government must STOP THE BAILIOUT MANIA NOW!!!

Ever since the Helicopter-Ben fueled up his money-helo, long term interest rates have been going up – slowly. That was not supposed to happen. Ben thought he could wave a magic wand and make everyone do his bidding. He was wrong. However, the bond market is massive and cannot be turned around like a Ski-Nautique boat; it’s more like an aircraft carrier. Therefore, I believe we have time to avoid the worst possible outcome: Jimmy Carter era interest rates. Call Congress and demand an end to the madness.

We should consider today’s action a shot across the bow. If the Treasury and White House do not cure their bailout psychosis, the USA will become the ultimate subprime borrower. “Change you can believe in.”

Sadly, I believe the current changes in the bond market have to do with; systemic structural weakness in the US financial system, the gross amount of government debt, and obscene fiscal irresponsibility. The lofty yield curve is a vote by the trading community that the US economy is a massive systemic risk, with a real possibility of core failure.