10yr approaching breakout

naufalsanaullah's picture

Original piece here.

...And that would spell harm for riskies. 10yr Tsy yields are about 10bps less than when we mentioned their relevance to risk assets earlier this week, although one could say they remain in their consolidating triangle. The prospect of an imminent breakdown in yields is looming, however, and a selloff through the 310bps level could be game over for equities and commodities.


Certainly the fundamentals are there for a risk asset decline. Initial claims came in today at 472k vs 450k consensus, as the US employment picture looks bleaker by the minute. Presented below is a chart of jobless claims (inverted, 4wk moving avg) vs the S&P, courtesy of Bespoke Investment Group:

IJC vs S&P

Meanwhile, the Philly Fed diffusion index dropped 13.4 points to 8 vs. 20 consensus, and May CPI declined for the second straight month to -0.2%, the lowest level since December 2008. The leading indicators mentioned in previous posts (ECRI LEI, retail sales, etc.) are warning of a double-dip, while coincident and lagging data are now suggesting the possibility as well. Shrinking tax receipts and swelled budget deficits are starting to take a toll on muni's, as MCDX components begin their widening. Growth has clearly stalled and the stimulus hangover is now upon us.

One of the symptoms of the spending hangover is the sov debt crisis that has begun in earnest in the European periphery and is making its way to larger Euro economies. As mentioned previously, Spain is in the cross-hairs presently. 10yr ESP Tsy spread to Bunds are in the 335bps region, while the bond auction today resulted in the 30yr going for a 115bps yield premium to last month's auction. The Kingdom has to roll over about €20B by the end of July and with record (and increasing) ECB deposit facility usage, it looks like a liquidity crisis could hit Spain this summer. It has a property bubble yet to really mean-revert (prices only down 11% from peak), huge unbooked losses on bank balance sheets, and austerity in an already-20%-unemployment environment. With aversion to interbank lending (record ECB deposits + EURIBOR creeping up), Spanish banks are already suspicious of each other's balance sheets and as more funding is needed, more granular looks at each other's books will occur, which will expose lots of unrealized losses (similar to fall 08 in USA). Meanwhile, the sov sector is going to have a tough time rolling over its massive redemptions in July, and as Spanish bonds fall, the Spanish banks' books will come under even more pressure.

But those are fundamentals and macro. Not always the most relevant factors for price action in this market. Equity could continue rallying into the summer, though this bounce off recent lows is suspect in volume (as well as in the fact that market leaders have been selling off and put in major tops). I'm looking for a failure at the 50DMA/1150 resistance level, which would mark the right shoulder of a large h&s (delineated in pink in the SPY chart below) that has been developing since last November. If that is indeed what occurs, the 1040 neckline, when breached, should usher major selling and would be a prime shorting opportunity. Indeed, ICI reported a $3.7B outflow form equity mutual funds last year, bringing the year's total to $27B. But that's all speculation; this market has a mind of its own and if we go on to April highs or beyond, it won't be the biggest surprise. One thing is for sure though: with global growth now stalled, an acute liquidity crunch in Europe, massive debt maturities in the next few months, and a still-rallying USD, whenever we do sell off, it should begin a strong and long wave down.


Speaking of liquidity crunches, BP is tendering a $10B bond issue, with 5yr CDS spreads close to 500bps, as well as selling $10B in assets and seeking a $5B credit line. This is an acute liquidity crunch, as BP has burned through 15% of its cash holdings in just a month. If equity and note declines continue, contagion could result-- BLK's equity value has already dramatically declined since the Deepwater Horizon explosion. Rumor is PetroChina may LBO BP if it drops below $15 PPS, which would have big political ramifications. Expect continued curve inversion.

But back to the possible imminent breakout in Treasuries-- as we stated, US sov FI finding a bid will signify (near-term) deflation and risk to risk assets, as there's a rush to "safety" and liquidity. Billy Gross over at PIMCO, for one, sees a Tsy rally in the works: TRF's bond holdings jumped by $35B MoM in May, bringing them to 51% of all holdings (from 36% in April).

Go England.

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Mitchman's picture

Spanish banks are already suspicious of each other's balance sheets 

We had a big debate here recently about STD.  What's your view of how exposed they are?

berated's picture

Dude--trust me--you don't want ANY exposure to STDs....

Mitchman's picture

I will happily take your advice in respect of every interpretation of the symbol...

PBRmeASAP's picture

Yes, the Bond Chart looks bad. Yes, the 50 DMA is threatening to cross the 200 DMA... and SPX1040 is the level that every HFT algo will sell on... But guess what? The Sun will rise in the East tomorrow. Life moves on, and people will still buy food and energy... so the economy will not grind to zero. Every time somebody tells me the World is going to End; It doesn't. ZH is the best site on the planet, but I will only Truly Worry when I see Bullishness on this site!

jeff montanye's picture

there was a touch of bullishness in late april/early may.  some were buying stocks like aapl and bp for known expenses in the next month.

AUD's picture

"10 yr approaching breakout"

So what? a trendline through the 10yr for the last 12 months shows yields increasing.

Credit spreads are still waaaay wider than before the '08 crash, fear still stalks the money market. There is little chance of another bond panic. Will the stockmarket go down? maybe, central banks seem to be happy with the current situation i.e. little credit pumping, but no panic either.

Nihilarian's picture


Call me when yields are breaking out when equities are 50% off of current levels.

Kreditanstalt's picture

"a selloff through the 310bps level could be game over for equities and commodities..."

Er....would someone please remind me why commodities are somehow regarded as a "risk play"?  Wouldn't a logical person want to hold these as a hedge against downside currency risk?

Or...don't those idiots SEE a currency risk? 

Augustus's picture

The problem is that you cannot really hold most commodities.  They are bought to be used, not stored and degraded by spoilage.  A better way to go at the commodities, if you believe the inflation story will eventually come to pass after the banks go bust, would be to own unproduced commodities in the form of miners or timber.

Kreditanstalt's picture

The correlations seem to change from week to week these days...hard to keep up with them.

mcguire's picture

new greenspan editorial in wsj, says among other things that we are the new greece... but an interesting comment on fickle bond yeild action relevant to this discussion. 



mcguire's picture

also, fundamentals in the bond market could reflect deflationary fundamentals... but per greenspan arguments, and pretty much according to most on this site, there seems no possible alternative to QE2 senarios... and if that is the case, the 10 year is not a really good instrument to hold.

just as an alternate explanation, the rally in the bond market, and esp. if a breakout does occur, may be indicating instead an anticipated "flight to quality" rather than just a deflationary event... ie. euro implosion, or worse, another false flag attack.

dcb's picture

tlt just broke out of a flag pattern to the upside.

Kreditanstalt's picture

The flight to bonds reflects desperation only...

ozziindaus's picture

.....and uncertainty just like USD and Gold

VFR's picture

In this tightly knit community I read and understand all I can. At times though I get lost and just wonder how many people can actually follow what is happening.

It reminds me of when a friend of mine had to give a weekly presentation of current and forecasted profits to a group of heavy weight investors. Manned with the usual charts he talked for 10 minutes before one wet behind the ears young guy, amongst the room of 25 (some whispering amongst themsleves , others using blackberries)  piped up. "Hang on a  moment 'is this the world weather forecast or somnething" :-) :-)

"Oh!" replied my mate "indeed it is, I'm glad someone is paying attention, I've been doing this weekly briefing every week for 11 weeks now and was beginning to wonder if anyone ever listened!, shall we start again?. "

I really hope someone really understands what is going on because I just get teh feeling that Grandma's knitting is not all it could be and it could all just fall apart very soon.



ozziindaus's picture

The Bond market is to Equities what the Equities are to the Economy. Therefore look to the bond market to be two steps ahead of the economy.