Chrysler’s gone, and in a few weeks time the same treatment could be meted out to the once mighty General Motors. But punters should keep a keen eye on the US bond market because the pressure for higher rates, which could end the bull run, isn’t going away.

In fact, the surge in the US money market was underlined overnight when 10 year bond yields hit 3.13%, before closing at 3.12%, the highest they’ve been so far this year. That’s more than 0.60% from previous lows reached when the Fed announced its decision to print money on 18 March.

Instead of bond prices rising and forcing down yields as investors rush for the safety of US Government securities, bond prices have been falling, forcing up yields.

Fears over Washington’s huge spending commitments have overwhelmed investor reticence over Chrysler’s failure and GM’s massive problems.

Around $US74 billion is expected to be offered by the US Treasury next week with investors worried that such a large offering may not be absorbed, or if it is, that the sale may see yields surge again to accommodate nervy buyers.

One thing bond analysts look at with auctions is what they call the “covered ratio”. It’s the amount of bonds bid compared with the amount being offered. So if the US offers up say, $US70 billion, they would want to see a covered ratio of perhaps 2 or better (ie. bids for $US140 billion). The higher the covered ratio, the higher the appetite for bonds and the better the prospect for lower rates.

The lower the covered ratio, the more bearish it is for bonds. If the covered ratio is lower than 1.5 and if the bids carry yields that are too high, the auction/auctions can ‘fail’ if the Government doesn’t want it done. If the ratio is 1 or less, the auction will fail, which would be bad news and see bonds sold off and yields rise, and share and commodity markets come under pressure. A Bank of England auction failed earlier this year, which upset markets and forced up rates.

And that’s the big fear with the current thinking in bond markets. Inflation isn’t so much a concern; the economy is too depressed and deflation is a danger. It’s in the mechanics of the bond auctions that problems could arise.

With well over $US1 trillion in bonds to sell over the next 11 months, there is a big danger of an auction failing or a major hiccup.

Fears of that happening, or fears of future falls in bond prices (and rises in yields) would help explain why the Chrysler struggle can have no real impact as rates rise regardless.

Chrysler’s rapid move into bankruptcy, agreed to by the US and Canadian Governments (who are supply the debtor in possession finance to keep the company going and honour warranties and guarantees) was a tidy, completed deal.

The Chrysler failure wasn’t a surprise, so the rush to a safe haven shouldn’t have been all that noticeable. It had been coming for over two weeks, but still Wall Street sold off shares, ending the rally that started on Wednesday after traders claimed to have seen a glimmer of hope in the Fed statement alongside US GDP figures for the March quarter.

The Chrysler bankruptcy filing came after some of Chrysler’s smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

That saw President Obama attack the hedge funds and investment firm creditors that refused to go along with the deal accepted by larger lenders, saying that they had “decided to hold out for the prospect of an unjustified, taxpayer funded bailout.”

It all would have been much easier to have allowed this to happen late last year, but in the wake of the Lehman Brothers collapse, the AIG debacle, the failure of Washington Mutual and the bailout of Merrill Lynch and Wachovia, Chrysler would have been one failure too many. GM would’ve been too big.

Now that the Government has forced Chrysler into bankruptcy, those bondholders who have rejected GM’s latest offer can be in no doubt that a similar fate awaits the carmaker and their holdings.

Obama said the Chrysler bankruptcy would be quick, efficient and controlled and an Administration official predicted it would be completed within 30 to 60 days. The Fiat tie-up due to be done during that period of time.

If it is, Chrysler gets an extra $US8 billion, and support from Fiat. The hedge funds and other holdouts wanted to get a crack at that $US8 billion, before it was handed over.

It’s as if nothing has changed in financial markets since the credit crunch started. Greed is still the driver.

Peter Fray

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