What Happens When There’s Nowhere Left to Run

18 | By Shah Gilani

What if I told you the safest (and by far the biggest) market in the world isn’t safe anymore?

The U.S. Treasury market is more than $12 trillion. That’s twice as big as the next two biggest nations’ debt securities combined – and is believed without question to be the safest market in the world.

Whenever there’s a panic and the markets freak out, investors dump stocks and buy Treasuries. That’s the so-called “flight to quality.”

However, before the recent new market highs, back on Oct. 15, when the last full-on flight to quality exploded, the U.S. Treasury market failed to do what it had always done.

It failed to be safe.

And nobody’s talking about it.

Today, I’m going to talk about it – and I’ll show you how this lack of safety will impede your ability to invest and make a profit in the future…

A Flight to Fear

Maybe people aren’t talking about it because it seems like so long ago. Maybe it’s because stocks have soared since it happened. Maybe it’s because it happened so quickly. Maybe it’s because nobody really wrote anything about it.

Maybe it’s just because it’s too frightening to talk about.

There’s no maybe about it. No one is talking about it for all the above reasons.

Early on Oct. 15, right after the U.S. markets opened at 9:30, for 10 crazy minutes, and then throughout the rest of the day, Treasury prices soared and yields collapsed on 10-year notes.

It was a full-on flight to quality on the heels of Asian stocks getting hit by new recession fears, rising interest rates on European peripheral sovereign bonds, slower growth numbers coming out of China, and blaring headline news about Ebola. Global equity markets were in a panic, and when the U.S. markets opened they tanked.

Trading volume in Treasuries that day soared to a record. The largest interdealer government bond broker in the world, ICAP, tallied $946 billion worth of Treasuries changing hands.

The 10-year yield, which on Oct. 14 was 2.206%, dropped like a stone on the morning of Oct. 15 to just below 1.86% – a stunning 16% drop in a matter of minutes.

Here’s what was so scary.

It wasn’t the global panic. It wasn’t the flight to quality that always happens along with global panic. It wasn’t even the fact that yields plummeted so quickly, though that was the by-product of the scariest thing that happened.

What was so scary was that yields plummeted because giant bond traders turned off their automated trading machines.

Hitting the “Off” Switch

Just like in the dot-com tech bust 2000-’02, the global financial crisis of 2007-’08 and the “flash crash” of 2010, traders turned off their automated computer systems.

These usually smooth-running machines easily pick off traders with slower or less sophisticated technology in “normal” times. However, these machines can rack up billions in losses when things aren’t “normal.”

Charles Comiskey, the top-dog Treasury dealer at the Bank of Nova Scotia, one of 22 “primary dealers” that trade Treasuries directly with the U.S. Federal Reserve, admitted he turned off his machines. So did Jason Rogan, the managing director of Treasuries at investment giant Guggenheim Securities. And plenty of others flipped the “off switch” as well.

Comiskey said, “Once we recognized things started getting out of control, we shut it off immediately.” Rogan admitted that “the market was moving too fast for our prices to keep up.”

In other words, the traders who buy and sell Treasuries all day every day – especially the biggest dealers with automated computer systems that – stopped trading at their usual pace, if they traded at all. They didn’t want to end up short on bonds as prices were soaring.

The same thing happens when market-makers in stocks stop buying because markets are tanking and they don’t want to be on the wrong side of a falling mountain.

How dramatic was the drop in yields? According to data compiled by Bloomberg, “the magnitude of the decline during trading on Oct. 15 has been exceeded only once in the past half-century.”

But there’s more to the whole affair. After yields tanked because bond dealers stepped aside, meaning their prices soared, they reversed course in a matter of days.

So, panicked investors bought some $946 billion worth of Treasuries (obviously an equivalent amount were sold) at near record low yields because the market’s machinery cracked, and then righted itself. Meanwhile, billions of dollars were lost when prices that had soared reversed course, leaving buyers who bought low-yielding inventory stuck as prices reversed the next day.

But don’t worry. Just as stock traders have forgotten about the flash crash and the global financial crisis and the tech wreck, bond investors will forget the Oct. 15 blowup.

Most of them already have.

Me, I don’t worry about freakish happenings in the stock and bond markets. I know they are going to happen.

There’s no ghost in the machine somewhere. It’s just a matter of fact – how things are rigged these days.

Here’s what I am worried about.

I worry about how to profit when the spit and tape holding our once strong markets together comes undone.

It’s going to happen, not just in the stock market, but now we know it’s going to happen in the bond market, too.

So much for safe and sound.

18 Responses to What Happens When There’s Nowhere Left to Run

    • chris crawley says:


      So were is the safest place to keep your cash? Gold & Silver

      Take the money offshore but pay ALL the taxes on your offshore account?

      Thank You for answering my e mail!!


      Chris C.

  1. Robert in Vancouver says:

    It’s amazing how stupid the so-called ‘smart money’ guys are.

    They rush back and forth in unison, like lemmings. When things are going up they all buy buy buy and on the way down they all sell sell sell. And they get millions of dollars in bonuses for consistently losing other people’s money.

    Their goal seems to be to lose less than the other guys, not to make more than the other guys.

    It’s exactly the opposite of the really smart guys like Buffet and Soros, When things go down they buy or hold, and when things go up they sell or hold.

  2. Ken Lewis says:

    Great article on the bond market. Great sophisticated systems still need to be turned on or OFF my “people”. Greed, greed and more greed. What happens when nobody wants to be left holding the bag?? Oh to be fleet of foot!

  3. Ken Lewis says:

    Great article on the bond market. Great sophisticated systems still need to be turned on or OFF by “people”. Greed, greed and more greed. What happens when nobody wants to be left holding the bag?? Oh to be fleet of foot!

    • Rob56 says:

      Like lemmings, perfect … When they stop buying the lesser skilled lemmings take over to take the fall. Seems that is the way it has happened forever. The last one goes to club fed and writes a book maybe two. One for the suckers who trusted them for reparations. The other for themselves on the art of hiding funds.

  4. Alice Maxwell says:

    You are a welcome voice of reason in our crazy investment world but it is too late for any sense now. We are on the rollercoaster and where it takes us nobody knows…..not Washington, London or Moscow and Peking.

    One thing is sure though. The Saudis, the Keepers of the Faith, are preppiing for collapse. They see Islam as the victor in the chaos that comes!

  5. Ken says:

    I simply cannot understand people who still buy treasuries. It’s impossible to earn any money on those things these days. It’s a guaranteed losing proposition, because the real rate of inflation is higher. The Fed is trying to say they are keeping inflation under control, but look at the sizes of the containers you are buying in the grocery. The amounts are decreasing about 25% in the ones I am tracking, but the prices are the same as they were. That is inflation. Also companies are putting cheaper materials in their “goods”. Take the high fructose corn syrup. This is subsidized by the Feds, and is a lot cheaper than sugar. This is another sign of inflation – lower quality. And yet I suspect that most people are oblivious to this. Also manufacturers are putting more toxic materials in their food, for example, some flavors of ice cream contain Propylene glycol, which is anti-freeze, and it is toxic.
    If more people were conscious of what is going on, there should be a definite reaction.

    • Ken says:

      Our country is in an advanced state of self-destruction, and nobody is even conscious of it. The dollar has lost 97% of its value since the Fed was organized in 1913, and the momentum has increased since 1999 when Glass-Steagal was repealed. From what I read, the big banks have not learned a thing since the 2008 fiasco. They will keep on doing what they’re doing until the entire economy is totally shattered. The banksters are totally ignorant of basic economics and they have an addiction – greed, which should be treated the same as alcoholism or drug addiction – a couple of years or so in rehab.


    Like any other game, when you look at the Bond Market, you have to understand what the ‘game’ is. The game is Price (the cost) rises because its Yield (interest rate) falls. It works the opposite way too. The current state of the Bond Market game has hit a point where rates are near ZERO YIELD and will NOT fall much further. Meaning prices are at their peak level.

    Anyone holding these peak level gov instruments realizes this, and they don’t want to be the ‘homeowner’ who paid too much for the asset and is now drowning underwater.

    There’s no point looking for a ‘greater fool’ because NO one is going to pay PEAK prices to own and hold long-term an asset that the Fed has told everyone is eventually headed to higher yields.

    How a sharp investor approaches this situation profitably is like with any other market. Price will ALWAYS fluctuate within ANY trend. The Bond Market’s Yield trend is headed UP, meaning its Price trend is headed DOWN. So using Short positions as it falls are a given. And when Price fluctuates up, using Buy positions are a given.

    As for automated trading programs, in my opinion, they’re an absolute joke. There isn’t ONE machine who can make critical judgment calls on the spot better than I can. Only a human being can ‘sense’ the character of a markets’ daily fluctuations and make the correct and profitable adjustments on the fly.

    If a trader isn’t making constant judgments and adjustments all during the time that they are IN a market, then they’re lazy and not taking the full amount of cash available to them. And isn’t MAX PROFITS why we’re trading? But, then again, there are ALL levels of commitment to ANY thing. And it’s a personal decision what level is YOU.

    • arblaster says:

      ALAN STEINBRONN says: “The current state of the Bond Market game has hit a point where rates are near ZERO YIELD and will NOT fall much further. Meaning prices are at their peak level.”

      Well they could, especially if there is a panic. It is not unknown for prices to go so high that yields turn negative. This happened to some US Treasuries in 2008, and more recently to German and Danish bonds.

      ALAN STEINBRONN – “Anyone holding these peak level gov instruments realizes this…”

      Well, no. Perhaps nearly everybody who wilfully holds them. But many – maybe most, for all I know – hold government bonds via their pension funds, life insurance, etc. So a lot of people are holding government bonds, and they don’t even know it.

      ALLAN STEINBRONN – “NO one is going to pay PEAK prices to own and hold long-term an asset that the Fed has told everyone is eventually headed to higher yields.”

      Well, a pension fund is legally required to invest a certain percentage in government bonds whether it wants to or not, however high the prices may be. Also, if the Fed goes a-quantitative easing, they could be buying Treasuries, especially if they want are trying to keep interest rates low.

  7. tobewan says:

    Capitalism – the game of greed – when it fails – it will be sudden – as prophesied. God wins. But the chaos will be subdued as divine controls are put into place. All false gods, including riches, will be abolshed. Kingdom rules will be righteous and equitable. There is no other way, it will happen! All humbled nations and institutions will come to be glad for superior intelligence and power to take control. This was written long ago in the best book available – the Bible. This planet and all here belongs to Him – we are polluters and trespassers thereof, yet His planning will correct it all. His Will is unstoppable. All nations will stop their ungodly squabbling, and learn to respect one another. – they will be taught. The world’s order as we have known it, is in the process of being changed, and all corruption will be stopped, will be replaced by a righteous kingdom beneficial to all – according to His pre-planned set timing. We were instructed to pray for His Will to be done – are we praying for it? Or fearful of it?

  8. Janet Dillabaugh says:

    Good article on the bond market. I always wondered what happening to that huge spike on the charts and now I know. What troubles me is where is all that money going to go when it shifts out of the bond market. Will it sit on the sidelines? I doubt it as money managers need to make their profits. So, will it go into the stock market and overinflate an already overinflated market? I find it all very scary.

  9. Dennis Hughes says:

    If the majority were right the majority would be rich! Seems like the majority want to be in bonds…. Watch out!

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