10 Year Under 2.7% As Legacy Curve Steepeners Cause Much Pain; Yields Imply 75 Points Of S&P Downside

Tyler Durden's picture

The pain for the biggest groupthink trade over the past year, the curve steepener, is getting unbearable. The 10 Year is now pushing below 2.70%, last hitting 2.69%, the lowest in over 16 years, as the 2s10s is at  219 bps, or the tightest since April 2009. At the same time, deflationary CMS trade are printing money. Look for many more steepener unwinds, especially if the 10 Year continues on its steady path to 2.5%. At this rate the record level may be hit in as little as 24 hours. And unlike before, equities tamely follow through the deflationary path suggested by credit. And now that equities have finally regained some semblance of rationality, they have a long way to drop: according to the mid-term chart between 10 Year and stocks, the fair value of stocks is around 1,025, or 75 points lower. We expect this level will be recaptured shortly.

Much more room to fall for stocks.


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oklaboy's picture

Dow melt up to 12000

Whizbang's picture

dude, it's just following the gold, silver, and oil melt up as ben kicks the hell out of the dollar. The yen just broke a record against the usd today. Which bodes poorly for the japanese as well.


Also, may I point out that ZH is now running ads for Cramer?! WTF is going on in the world. Profits Bitch!

Jake Green's picture

Also, may I point out that ZH is now running ads for Cramer?!


cookies, biatch

functionform's picture

I always ask myself, WWCD?  

DoChenRollingBearing's picture

@ Whizbang

I had 3 ads for Sarah Palin last night here at ZH!

VERY TRUE re Japanese exporters.  Our Peruvian import co. buys some 35% of our bearings from Japan, they are in a world of hurt in highly competitive (world) industrial product.

Bearings are a hard assets...

Cursive's picture

SPX 75 to 100 point drop and then bulltards will learn what the pause that refreshes really means.  This is going to be a hell of a football season for punters.

assumptionblindness's picture

1. Crush equity futures, check.  2.  Sell 10-year bonds at 2.69% yield at 3.4 bid to cover ratio, check.  3.  Bid up equity markets after 'successful' auction, no problem...

Mitchman's picture

From David Rosenberg's letter today.  A bit O/T but still relevant:

Instead of declaring an outright war on unemployment, we instead have a government bent on measures to boost spending on cars and homes that nobody really wants since, at the margin, all people want to do is boost their once-depleted savings rates and get out of debt; or at least a half dozen housing plans to help distressed mortgage borrowers. Or infrastructure spending that so far seems to have helped line the pockets of public sector union officials with no obvious payback in terms of job creation. At least FDR paid people to work, even if it meant skyscrapers, bridges, monuments and national parks. They didn’t get paid do sit idle for 99 weeks so they can then drop out of the labour force and into oblivion (almost 45% of the unemployed have been so for more than 26 weeks — in no other recession in the past six decades did this share ever cross above 26%).


traderjoe's picture

Nothing has been addressed/fixed/solved. All of the structural inefficiencies that got us into this pickle are still with us, plus now we have an extra $3-4 trillion in debt. The state bailout package yesterday was one more example of papering over today without fixing anything. We'll be right back 'here' in a year, with the states asking for another payoff. That is ... if we make it a year. 

slobbermut's picture

Now now...those state workers, aren't normal people, they are special - they have unions and can't be expected to endure hardship like the rest of us peons.  You need to get with the program!  What about 'special' don't you understand?

Hunch Trader's picture

It's the European Disease, staying on the dole and only working for cash. It hasn't brought anything good for Europe and doubtful the experience in US will be any different.


People will become lazy and even hostile to honest work and paying taxes.

Assetman's picture

But... but... I thought a steep yield curve is a precursor to sustainable economic growth and a bull market for investors.

What do you mean.... this time is different???

Wheatman's picture

NO. It is illegal to sell, and legislation is before the House to reveal the PPT as a Department funded to defend national security. Wikileaks have already given the tip for the PPT incorporation. The S & P must not fall, or we are at war. Buy wheat though.

DoChenRollingBearing's picture

For those of us not in the futures & options markets, it is easy to buy the ETF that is 25% each of Wheat, Corn, Soybeans and Sugar, symbol is DBA.

I think there are (or are coming soon) ETFs for single ag commodities.

bugs_'s picture

Lock in those incredible high yields now.

Tense INDIAN's picture

this all has happned because of this::

EDUCATION was never meant about learning



vote_libertarian_party's picture

So at what point is there a major derivitive blow-up?  You would there are some MAJOR wrong bets out there.

Bill Lumbergh's picture

The currency markets appear to be driving a lot of weakness in the equities with the Euro currently being smoked.  Needless to say if the Euro continues this downtrend and possibly breaks the recent lows there will be dislocations everywhere.

trillion_dollar_deficit's picture

Uh ... the 10y has been much lower than 2.7 as recently as early last year. You're better than that TD.

vote_libertarian_party's picture

He should be pointing out that the 2, 3 and 5 year are at record low yields.

papaswamp's picture

-Rico analysis!

-Small Red incandecent bulb possibly indicating trouble


Scooby's picture

10yr yields got to 2.055 on 30 Dec 2008.  yikes.

jkruffin's picture

See you at 1% on the 10yr, when Benny Boy starts buying next week.  See you at DOW 5k as well.  Anyone still in stocks, deserves to lose their money.  Don't want to hear any whining from Leo and the crowd, who are still living in fantasy land, when they get taken to the cleaners.

DoChenRollingBearing's picture

You won't hear any whining from Leo...

godfader's picture

Bonds saying "no hyperinflation anytime soon" loud and clear.

Myshkin's picture

Newbie question: What is the ratio (or measure) used to compare bond market valuation with the S&P?  What formula is used to determine where the bond market is valuing the sock market?  I apologize in advance for the newbie question, but thanks in advance for the answer.  

old_turk's picture

Usually it is the treasuries index (risk free) to the S&P 500 (risk seeking) and usually they are reverse correlated meaning that they move in opposite direction to each other as they both compete for investment dollars.  It is mainly used as a gauge of market greed/fear and not to indicate the relative value of either.

But some analysts do do that but usually, as in this case, to illustrate a point. There is a big divergence out there ... indicating either equity overvaluation or a bond overvaluation and (most of the time) the bond world is making the correct assessment.

Johnny Yuma's picture

Well golly! Looks like we've broken out of our rising wedge pattern on the ES and the fireworks show has started... Market internals are looking extremely bearish today. Could be a down day all day. Professional gap down, no gap fill today... 

Tense INDIAN's picture

whats the target of this breakout in about 2 weeks...???

Johnny Yuma's picture

It's hard to say exactly but if there is great participation in what I think is the next leg down, a near term target would be around 952 on the ES if we can break below 1040. If this move is real though and it's a continuation from the high in April, then around 443 area... Sounds extreme to me but it's just one big fibonacci sequence. Doubt that would happen in 2 weeks though. But to answer your question, I would say we break below 1,040 in the near term provided we have true sellers. The Russell 2K has now broken below both the 200 DMA and the 50 DMA which I think could be giving us an indication of things to come for the large caps... 

Grand Supercycle's picture

DOW/SP500 daily charts are now bearish.

So the downtrend I first mentioned in early May this year, can now resume.