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2s30s Hits Thirty-Year Wide
Just in case there is anyone still doubting what an impact the Fed's intervention in the bond market has had courtesy of the first (soon to be followed by second) QE program, one needs look no further than the 2s30s curve, which, at 372 bps is now the widest it has been in thirty years. However, regardless, of how one interprets Bernanke's indirect market manipulation, one thing is sure - investors are walking, no running, for the hills when it comes to the long-end of the curve. We wish Geithner all the best in his attempt to issue hundreds of billions of debt with a tenor greater than 10 years.
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and all the kings men couldnt put humpty dumpty curve back together again...
Tue Dec 8, 2009 8:51am IS
China should increase the proportion of gold in its foreign exchange reserves to ensure the safety of its overall portfolio, an official Chinese newspaper said on Tuesday.
http://in.reuters.com/article/bankingfinancial-SP/idINTOE5B702F20091208?...
This somehow seemed relevant to the above post.
Nice find, MsCreant. Thanks for sharing.
This makes me think that, although Bernanke may win the reconifmation battle, he's going to lose the eventual war against the public. Capitulation has an interesting etymology.
The Public ???
They'll just have to get used to 8% 30-yr. mortgage rates.
tenure TD...
as the long end rises, the yield curve steepening is
very bullish. Banks are making a killing right now,
similar to 2002-2003. They can borrow at essentially 0
and lend out at 5-6%. Who wouldn't want to lend in
this environment. The problem of credit contraction is essentially over.
All the talk about this being a problem is propaganda. The fed wants the steep yield curve to help the banks earn their way through this fiasco. The long end wouldn't
budge until the fed started "publicly" buying
treasuries. The fed has been in the treasury market
since the creation of the dollar/debt system
...but they're not lending.
wtf???????
shouldn't gold be going crazy on this?
IMO yes, that is why I posted the gold article above. Back to basics, over a long enough time line, this thing is fcuked.
last 14 mo $GOLD +65%, GDX +173%, $SILVER +87%, $XAU +160%, $PLAT +84%
plot the above against the 10-2 from 1990 & see what happens as the curve approaches peak spread & the several months post peak ... viz 1992-1993, 2003-2004, 2009-2010
One would think gold would go crazy!
I am long physical Au, Ag, Pt and also hold the TBT 'cause I don't trust 'em.
No problem. Just sell at the short end; the rates are lower there anyway and it will help reduce the deficit and debt. Borrow short and lend long...
Foreign CB's starting for the Exits.
but all the supply is in the front and belly so a reversal bear flattener could be brutal - a la '94.
remember Orange County? The reverse repos that blew up when the collateral values collapsed due to rising interest rates? Then they defaulted on their outstanding munis..
sounds familiar....
2010 - (minus) 1982 is 28
1982 - 1913 = 69
69² = dinner for 4
LOL, good one!
So much for the BS theory that the market really sets ST interest rates, not the Fed. Some idiots actually believe that.
uh the market does set short term rates - that's why t-bills are zero and fed funds is below the target rate
there is no market demand for the money
below the target? isn't the target a range, with the lower end being zero?
i suppose t-bills would still trade at zero if the fed hiked rates tomorrow to 2%?
Deflationists take note...yield curve is more important than nominal yields: look what happened after the widening in 2002-2003
You get a flat/inverted curve when the market prices in deflation(ex. 1999 and 2007) as longer term fixed income securities take on a premium relative to shorter duration; the desire for a higher, risk-adjusted relative nominal return in bills is trumped by a flight into duration. In other words you're willing to take a lower nominal yield because it will be guaranteed for longer, hence why inversions happen and are not paradoxical.
You can't claim the bond market is signaling deflation when duration continually gets discounted. If you buy a 1mo bill and inflation picks up you don't get hurt, if you buy a 30 yr bond and it does you get destroyed...
follow the spreads/differentials not the nominal rates
well said, thus my comment on the BS about the market setting rates.
ST rates are low because the market is pulling in duration. no one wants to get caught too long if inflation picks up and the Fed has to fight it.
and why would inflation pick up? because the Fed has rates at zero.
this notion that the market sets ST rates independent of what the Fed is doing is complete nonsense.
in a real free market, no way in hell ST rates would be near zero.
I don't think anyone disagrees with you about the importance of the yield curve and, in particular, the current steepening. This is part inflation expectations, and part Fed promotion. A steep yield curve is a part of their game plan.
However, factor in some realized losses in loan books or the cumulative effect of bank failure Fridays, and the curve can and I believe will flatten.
Treasury default, bitches!!
I am Chumbawamba.
CROSS THAT LINE, BITCHES!
Sweet. You can 'junk' yourself.
Junked!
And my TBT?
Take that, bitches!
as the long end rises, the yield curve steepening is very bullish. Banks are making a killing right now, similar to 2002-2003. They can borrow at essentially 0 and lend out at 5-6%. Who wouldn't want to lend in this environment. The problem of credit contraction is essentially over.
All the talk about this being a problem is propaganda. The fed wants the steep yield curve to help the banks earn their way through this fiasco. The long end wouldn't budge until the fed started "publicly" buying treasuries. The fed has been in the treasury market since the creation of the dollar/debt system
agreed, banks are making a killing in that area which will help them pay off their legacy losses, but their "lending" is to the government - USTs and Ginnie's, they aren't taking credit risk, so to claim credit contraction is over is a bit false.
Also, i seem to remember a lesson taught to me once, that borrowing short and lending long can be a problem, am I remembering that right?
Yes the problem for those claiming victory is they fail to account for how the economy can possible support/service the incremental debt. Making banks healthy by issuing treasury debt and force feeding it down the money center banks via Fed induced IV is shuffling deck chairs. Furthermore, that new money is being recycled into treasury in a close loop. Bulltardds can't wrap their head around the circular reference. One of the talking points for the bank bailout was saving the pref. securities holders across the insurance and pension complx to preserve a cascade. The only thing with duration enough to match liabilities are said securities. So, if the banks have no lending opps sans another bubble outside of equity (world is amass in excess capacity and lending opportunities will remain dearthy), the excess capital gets recycled into what? treasuries, corproates and euqities? Then when the tax revenue drops per said changing behavior (and hard assets explode) the treasury goes poof and the banks find themselves in a similiar position, only this time more massivily long duration in their investment portfolios or with massive NIm compression from all those 0% Tbills?
An thoughts on such a scenario: banks would clearly be given a nod to try and hedge their dollar holdings for a potential devalue as such a move would single handedly destroy their balance sheets anyway?
The question is if the banks new a holiday or devalue was coming, how would they try and hedge their books? Sov CDS in Euro? Euro fx flows? ideas?
If I were tipped that there was going to be a devaluation, an inflation swap with knock-out to cheapen it would be an effective and discrete way to profit.
Lend to whom at 5-6%? Why do creditworthy companies want to borrow, to add more excess capacity? Why would creditworthy individuals borrow, other than to refinance jumbo mortgages with principal balances above Fannie, Freddie and FHA lending limits? Banks aren't too eager to originate and hold mortgages.
bingo.
I don't know anyone who wants to borrow.
It's simple- just lower rates to get people to go chase yield.
Alan G
In working through some problems today, it occurred to me that there is something really wrong with the Treasury not breaking through the debt limit. The observation is that there is no where enough slack to offset outgoing expenses without an on-demand source of liquid funds. There must be a slush fund of sorts to maintain balance when we are so close to the limit. If not breaking through this limit is politically motivated, there may be some naughtiness going on.
My guess, other than build in slack from the FED, is the TARP extension loan facility. There must somebody on the inside that knows, the real cash flow offset through Treasuries is facilitated on the back of TARP loans through the primary dealers. Its not possible to be so close to the limit and not have an additional fudge factor play.
Any thoughts ZH?
Mark Beck
Mark,
I am not a finance person so you need to weigh what I have to say knowing that. Also, this sounds really nuts.
I have a concern. Because they don't tell us what is going on behind closed doors, I wonder just how bad it really is. We know we are insolvent, technically bankrupt. We know all the banks are too. Too much debt vs. too little income/cash flow. Now if you and I are in that situation, we can go BK and we take a ding on our credit report, have some consequences, and we move on. The rest of society does not collapse if we do this, there is plenty of surplus for everyone.
What if the USA can't do that, because they know everything internally will collapse? So you do things like money shuffling between the TBTFs, the treasury, primary dealers, the fed, congress, TARP, TALF, (fill in your favorite bailout here), to continuously "kite" the system. Or at least that is what it looks like is happening. It looks like they are "working" the system. But what if looking like you are cheating, is the cheat? What if leaving all these paper trails for us to find and bitch about is a way to take attention away from the idea that the system is so destroyed, it no longer makes sense anywhere on a macro level scale? What if the whole thing is a giant Potemkin village, to keep us from freaking out and tearing everything apart?
Resources are currently flowing, money is being printed, we are doing the best we can, but the whole thing is already toast? Your question to ZH implies that you see some irregular cracks in the cosmic egg. What if that egg is cracked, scrambled, and eaten, already? What if the whole game is not hiding that we are in a depression? What if we are hiding what is a logistics and accounting disaster? Bigger than a Tsunami, earthquake, volcano eruption, and meteor put together?
I do not know if this is helpful. So badly I just want to yell, "Everyone out of the water!"
Every time you and I guess what they are up to, I wonder if we help them. I wonder if they are TARPing everything and some insiders know it and are collecting assets under big roofs so that they can be lump TARPed.
Then they default.
If I am not a nut with a nutty idea to express, the question becomes, where do you go for shelter? My sense is that some local systems are emergent and sustainable. Bits and pieces have integrity, and work. But the macro won't make sense, can't make sense.
In this version of reality, Bernanke is not Helicopter Ben dropping cash, he is a masterful story teller, making you believe that the system is a big cheat. That would imply there is still a system when there isn't, only pockets of relationships.
I doubt this is what you wanted. I just needed to say it one time really clearly. And your observations seemed to fit. Other things can fit too, and maybe my imagination is just too wild.
"Deflationists take note...yield curve is more important than nominal yields: look what happened after the widening in 2002-2003
You get a flat/inverted curve when the market prices in deflation(ex. 1999 and 2007) as longer term fixed income securities take on a premium relative to shorter duration; the desire for a higher, risk-adjusted relative nominal return in bills is trumped by a flight into duration. In other words you're willing to take a lower nominal yield because it will be guaranteed for longer, hence why inversions happen and are not paradoxical.
You can't claim the bond market is signaling deflation when duration continually gets discounted. If you buy a 1mo bill and inflation picks up you don't get hurt, if you buy a 30 yr bond and it does you get destroyed...
follow the spreads/differentials not the nominal rates"
But look at the chart again and you see a wide spread at points in 2007 and 2008. The predictive power of this spread seems to be faulty at times. Maybe it is mostly a coincident indicator. If inflation was really about to take off 6 month t bills wouldn't be at 0
Thats why you look at the 2s10s and 2s30s, as TD pointed out in a recent post the 2s30s spread has hit a 30yr high..
edit: lol, its this post. got carried away with reading comments from numerous posts 0.o