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After Losing Control Of The Long-End, Will Vigilantes Push Bernanke To Act On The Short-End?

Tyler Durden's picture





 

While it is well-known by now that Bernanke is slowly but surely losing control of the long-end of the curve, and increasingly more so the 10 Year (3.66%) and the belly itself, little has been said about the short end, which is where the bond vigilantes get to say a thing or two about future QE. And just like last year, when the 2 Year surged to over 1% in Q1 and early Q2 before it was made clear that the Fed's first attempt at pulling out of the central planning business was a failure and required the gradual reintroduction of yet another quantitative easing episode, so now the 2 Year is starting to slide rapidly higher in what is becoming an identical replica of last year's episode. If that is indeed the case look for the 2 Year to close March just wide of 1% and to peak at 1.2% in April before the wheels fall off in the latest attempt to extricate the Fed from the US economy, and we get a QE3 announcement some time in May.

Yet what is even more important than spot levels, are 2Yr10Yr forwards. As the chart below shows, the spread has just jumped to 3.70%, taking out previous recent early 2010 highs (yes, when the 2 Year spot was trading north of 1%), and is all the way back to levels last seen in 2004, when the Fed was actively in the process of deliquifying markets. Is the forward curve telling us it is high time for the Chairsatan to finally do the right thing? And if not the case, is it time to put on a convergence trade between the spot and the 10 Yr forward?

And as a reminder, the last time the spot-fwd spread was so wide, it was the 2 Year which moved almost in a straight line from 1% to 5% in just over 2 years. Of course, what happened next, we all know... and so does the chairman. Which is why anyone harboring dreams that there is any even modestly remote chance that short end yields will voluntarily go higher, should reevaluated their thesis.

 


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Mon, 02/07/2011 - 17:27 | Link to Comment treasurefish
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Abolish the IRS, End the Fed, Restore Common Law, and Uphold the Constitution.

 

Ron Paul 2012!

Mon, 02/07/2011 - 17:32 | Link to Comment gwar5
gwar5's picture

Yes to all of that.

Mon, 02/07/2011 - 17:34 | Link to Comment wisefool
wisefool's picture

I look forward to the day I nolonger have the option to post +1099. Cause you have to pay that bill with non fiat currency.

Mon, 02/07/2011 - 17:43 | Link to Comment whatsinaname
whatsinaname's picture

Who really controls the bond market - is it not the TBTF banks again ?

Mon, 02/07/2011 - 20:13 | Link to Comment JLee2027
JLee2027's picture

Markets eventually destroy controllers.

Mon, 02/07/2011 - 20:19 | Link to Comment Thomas
Thomas's picture

Only temporarily.

Tue, 02/08/2011 - 01:08 | Link to Comment rocker
rocker's picture

The "Patriot Act" must to the first to leave.  I want to enter a Hockey Game without a body search.  Puck Them.

Who was the asshole who said they can void my right to privacy.  "Homeland Search".  Bushit that.

Tue, 02/08/2011 - 02:17 | Link to Comment JLee2027
JLee2027's picture

That's not the Patriot Act. That's a bunch of despot Marxists (read Democrats) who want total control.

Mon, 02/07/2011 - 17:47 | Link to Comment jus_lite_reading
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If things don't change fast in this country, I'm heading south to central or south america. I say this with all serious and no sarcasm implied. When the SHTF, the developed nations will feel it the most. Revolutions are brewing around the world.

Mon, 02/07/2011 - 18:16 | Link to Comment cxl9
cxl9's picture

Well, yes. But doing so would throw millions of people out of work. Many of them (local police, Federal agents, prison guards) would be armed, aggressive, angry and not too bright. Others (lawyers, bankers, civilian government empoyees at all levels) are incapable of producing anything of value. A vast majority of the jobs in this make-work enterprise called modern industrial captialism would not exist in a world as you envision it. What to do with all those excess useless workers? Sustain them with welfare? Liquidate them? Re-train them? (To do what, exactly?) Difficult choices.

Mon, 02/07/2011 - 20:04 | Link to Comment Hedgetard55
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Liquidate them. "Carousel".

Mon, 02/07/2011 - 20:27 | Link to Comment Logans_Run
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The most difficult will be the bankers and lawyers. Probably too far down the corruption road to salvage or retrain.

Mon, 02/07/2011 - 22:58 | Link to Comment DarkMath
DarkMath's picture

ooo yuck, that looks like Bridgette Nielsen's tomato circa 1986 or a post-op ex-ball sack. Polka dots...Polka dots?

Tue, 02/08/2011 - 01:32 | Link to Comment rocker
rocker's picture

Oh Bambi said, "We want our money back."   He "Failed that effort".  The banksters own our presidents. Bambi Failed!

The largest financial crime in U.S. history. And not one bankster went to Jail. What's wrong with that picture?

Oh yeah, we are more worried about Health Care programs, Gun Laws, Abortion, and the notion that the government spends too much.

While Lloyd Blankfein, Hank Paulson and Neel Kashkari just raped more Americans for more money for their own personal gain.  We all pay more for Food, Fuel, and everything else because of the Bailouts of 2008 for Bush & Co.  Who said, "Heck of a Job Hank." 

It was the "Largest Financial Crime" in U.S. History.  Has Goldman Sachs "Ever" been involved in a financial question before.

Tyler: Please: Help:  Have they ???  The average American needs to know what they do not know.

Tue, 02/08/2011 - 05:11 | Link to Comment Blank Reg
Blank Reg's picture

Stuff them all on the 'B' ark and send it out into space.

Mon, 02/07/2011 - 20:13 | Link to Comment JLee2027
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Abolish the IRS, End the Fed, Restore Common Law, and Uphold the Constitution.

 

Ron Paul 2012!

 

I can agree with all that. 

Mon, 02/07/2011 - 20:17 | Link to Comment A Nanny Moose
A Nanny Moose's picture

A-Friggin-men

Mon, 02/07/2011 - 17:27 | Link to Comment Gubbmint Cheese
Gubbmint Cheese's picture

I double dog dare them...

but know they don't have the balls.

 

 

Mon, 02/07/2011 - 17:30 | Link to Comment DaveyJones
DaveyJones's picture

the short end of a stick maybe

 

Mon, 02/07/2011 - 17:31 | Link to Comment NotApplicable
NotApplicable's picture

Bond vigilantes? Yeah, right.

Mon, 02/07/2011 - 17:45 | Link to Comment redpill
redpill's picture

vigirantes maybe

Mon, 02/07/2011 - 17:35 | Link to Comment gwar5
gwar5's picture

About time we heard more from Bill Pimpco on bonds.

Mon, 02/07/2011 - 17:35 | Link to Comment X. Kurt OSis
X. Kurt OSis's picture

I always wanted to be a bond market vigilante... even a subway vigilante...

mmm... subway, eat fresh!

Anyway, I guess I'll have settle for James Carville. 

mmm... gumbo.

 

Mon, 02/07/2011 - 17:43 | Link to Comment plocequ1
plocequ1's picture

Bond vigilantes.. Wasn't that the movie that starred Roger Moore and Charles Bronson? Or was it Deathwish 4, The search for James Bond?

 

Mon, 02/07/2011 - 18:27 | Link to Comment MachoMan
MachoMan's picture

I think it was training day...  you ever had your shit pushed in bro?

Mon, 02/07/2011 - 18:33 | Link to Comment Flakmeister
Flakmeister's picture

  Ever cram it in the boot?

Mon, 02/07/2011 - 17:38 | Link to Comment system failure
system failure's picture

Absurb my curve! Nothing is out of control. Just because people sole search for the truth away from media controlled outlets does not mean anything is out of control. Ben said he could change policy in 15 minutes to overcome any issues. Ben was Time magazine's Man-of-Year. Ben has more servants than any of us.

 

However, there has to be a threshold when the number of servants become overwhelming to control, like Egypt for instance. Good Luck Ben. LOL......

Mon, 02/07/2011 - 17:56 | Link to Comment X. Kurt OSis
X. Kurt OSis's picture

It'll never happen.  The central planners can kick these problems out into several more economic cycles.  The peasants can be placated with endless re-runs of American Idol.

Ben will keep his man of the year status on his facebook page for many years to come and Goldman will survive no matter what happens.

The Stratfor guy predicted that this century ends with the Mexicans taking over North America and emerging as the next empire.  I, quite frankly, am fine with this outcome.  I like taco's and Canada remains in check.  But rest assured, Goldman will survive and that's all that really matters.  Viva Hombre de'Oro!!

Mon, 02/07/2011 - 18:29 | Link to Comment MachoMan
MachoMan's picture

Do you really think that's going to happen before they get: (a) rounded up in trains and put into slave labor camps [kinda already there]; (b) get biological weapon X unleashed on them; or (c) collectively demolished via traditional military... 

Wouldn't that require some degree of unity and direction on their part?  I mean, I could see a zerg like creep over north america (already happening).  But, some type of unilateral arm flex is not really in the cards for the foreseeable future.

Mon, 02/07/2011 - 18:56 | Link to Comment X. Kurt OSis
X. Kurt OSis's picture

I traded my crystal ball in 2007 for a supersenior tranche in a synthetic subprime mortgage pool that Goldman assured me was bulletproof.

Friedman however predicts this outcome by extrapolating the trend in demographics to infinity and concludes that by the end of the century 80% or some nonsense of Americans will to some degree Mexican. I didn't say it was a good prediction. By today's standards in mathematics, its as good as any other.

Mon, 02/07/2011 - 18:59 | Link to Comment MachoMan
MachoMan's picture

I suppose the white flight we experience on a municipal level giving rise to suburbia could also be felt on a national level...  thus avoiding an agressive type confrontation...  otherwise, I see no alternative...  limited amount of pie and too many hands trying to get it.

Mon, 02/07/2011 - 22:04 | Link to Comment I Told YOU So
I Told YOU So's picture

I sucked as zerg, very good as toss.

Tue, 02/08/2011 - 01:27 | Link to Comment snowball777
snowball777's picture

Carriers have arrived!

Tue, 02/08/2011 - 01:38 | Link to Comment rocker
rocker's picture

@ system failure: +10

Mon, 02/07/2011 - 17:38 | Link to Comment Sutton
Sutton's picture

the Five year is screaming.

What does the 2's/5's chart look like

Mon, 02/07/2011 - 17:45 | Link to Comment Yen Cross
Yen Cross's picture

Are we suggesting tightening m-supplies, or raising short term rates? Hmmm.

Mon, 02/07/2011 - 17:45 | Link to Comment jus_lite_reading
jus_lite_reading's picture

What are you blabbing about again Tyler? The yields are increasing as the Fed expected it would because of a superb recovery. Remember, there is no inflation. Never.

Mon, 02/07/2011 - 17:52 | Link to Comment redpill
redpill's picture

It's a knife-edge-thin line that Ben Bernugabe has to walk, on one hand that rising yields are evidence his QE is turning around the economy, yet not so effectively as to be able to actually stop doing it.  

Mon, 02/07/2011 - 17:50 | Link to Comment Instant Karma
Instant Karma's picture

Quantitative Easing has to continue. There is no other way to fund the buget deficit. End of story.

Mon, 02/07/2011 - 17:53 | Link to Comment redpill
redpill's picture

I'd prefer Qualitative Defaulting

Mon, 02/07/2011 - 21:51 | Link to Comment Hephasteus
Hephasteus's picture

The fed prefers pontificating sleazing.

Mon, 02/07/2011 - 18:15 | Link to Comment spongeBOB
spongeBOB's picture

More QE will not be automatic. The last one added $900B to the deficit. I'm betting on crashing the equities and cause flight to the treasuries which accomplished the same thing. Of  course Goldman will be out way before then.

Mon, 02/07/2011 - 19:49 | Link to Comment blind squirrel
blind squirrel's picture

I tend to agree with your thinking. Also I think the Fed is probably less concerned with the absolute level of the 2Y and more concerned with the steepness of the curve.  They want to engineer a steep curve to prop up their crony banks with an easy source of revenue.  That's why they preannounced the amount of QE2 purchased at each maturity and purchased less moving out on the curve.

Mon, 02/07/2011 - 21:05 | Link to Comment SWRichmond
SWRichmond's picture

I am expecting a collapse of sorts here.  There is too much inflationary pressure becoming evident in commodities and PMs.  Ben is actually being asked about his role in food price-induced revolutions. 

Ben is trapped, but will continue to play the game anyway.

Mon, 02/07/2011 - 18:05 | Link to Comment topcallingtroll
topcallingtroll's picture

I know this aint a trading thread but i am hijacking this sucker for your own good. Look at price and volume on psdv. The earning report will be benign and no final fda decision is imminent. Expect a little relief rally the next couple of days. Take all your savings and go long in the morning. If.your wife has any questions tell her an anonymous troll told you to do it.

Mon, 02/07/2011 - 18:07 | Link to Comment Flakmeister
Flakmeister's picture

   The Bernank knows we are fucked, his only hope is to inflate and have the U.S. as the last man standing. Europe and China coming in a close second is acceptable. This can be done as long as the U.S. military has primacy, which in turn depends on the the militarys faith in the dollar (think of Rome as a well studied example).

I don't think its an engineered collapse, it is a calculated guess that this is the best way to unwind it...

Sauve qui peut, and it is being telegraphed for anyone that wants to listen.

  The outcome will either be war and an ensuing collapse or a revaluation of the dollar at gun point. As bullish as I am on precious metals, I do not think they will be a panacea. Equities in physical plant, i.e. hard industrial assets that have prohibitive replacement cost, have a good chance of holding up provided we don't self immolate. 

Mon, 02/07/2011 - 18:12 | Link to Comment Yen Cross
Yen Cross's picture

 Off topic. Where was Santelli after he chastised Liesman on Friday? I love the blue blood between those two. What Rick was in transit back to New York from Chicago. Keep up the good work Rick!

Mon, 02/07/2011 - 18:17 | Link to Comment ivana
ivana's picture

2y looks really choppy since nov. Allmighty ben and powerz have trouble to fix this algorithm and short term kpi. too many living souls here which would like to have max cash when deflation/default party starts.
What could please them instead? May be much much higher USD? Just an idea... trilions are born that way anway

Mon, 02/07/2011 - 18:20 | Link to Comment AUD
AUD's picture

You can't objectively measure the value of government credit with the credit of the central bank, whose 'assets' are the same government credit.

Interest rates are meaningless.

Mon, 02/07/2011 - 19:08 | Link to Comment chump666
chump666's picture

China.

We get out 3-6mth correction, USD bid, stocks short, UST fall, emerging markets risk crosses sell, commodities short - warning signs are now on oil,

At this point this isn't a hedged market, so hedge funds will start to short to maintain profit advantages.  It's overbought market.

China UST dump should help the correction, that and hedge funds will buy USD and short stocks etc

Mon, 02/07/2011 - 19:10 | Link to Comment chump666
chump666's picture

...not to forget Chanos china short should finally payoff

Mon, 02/07/2011 - 19:44 | Link to Comment Obaminator
Obaminator's picture

Open up and say "Ahhhhhh".

Things really are "different" this time around...Dont Worry...Weekend at Bernies!

Mon, 02/07/2011 - 20:37 | Link to Comment Yen Cross
Yen Cross's picture

It's different. In a good way. Bernie was dead. Remember the funny little pun of the movie?

Mon, 02/07/2011 - 20:43 | Link to Comment duncecap rack
duncecap rack's picture

Does congress have any say over monetary policy? Does Ron Paul have any legislative way to rein in Ben Bernanke? Just wondering if in the upcoming hearing Ron Paul has called to discuss QE's effect on unemployment has any real chance of effecting change or is it just venting?

Mon, 02/07/2011 - 21:11 | Link to Comment Quaderratic Probing
Quaderratic Probing's picture

zimboblifcation is required because the race now is for billionaires to become trillionaires. Its for the history books " I was the first US dollar Trillionaire ".

Mon, 02/07/2011 - 21:13 | Link to Comment Quaderratic Probing
Quaderratic Probing's picture

zimboblifcation is required because the race now is for billionaires to become trillionaires. Its for the history books " I was the first US dollar Trillionaire ".

Tue, 02/08/2011 - 00:59 | Link to Comment johnnynaps
johnnynaps's picture

Meanwhile, those future Trillionaires are fighting a 10 cent minimum wage increase due to it "hampering" economic growth!

Mon, 02/07/2011 - 22:01 | Link to Comment merehuman
merehuman's picture

beneficient Ben befuddled and besmirched ,bernanked us all.

Mon, 02/07/2011 - 22:09 | Link to Comment Tsunami Effect
Tsunami Effect's picture

be careful what you wish for!  my money is on the FED anouncement this week targeting its next month "large scale asset purchases" on the long end of the curve.

Mon, 02/07/2011 - 22:10 | Link to Comment Yen Cross
Yen Cross's picture

I'm still working these boobies. Yea that yield curve is troublesome. Even when you invert it. Fake tits!

Mon, 02/07/2011 - 23:01 | Link to Comment firstdivision
firstdivision's picture

Some serious correlations seem to be breaking down, or am I just imagining things?

Tue, 02/08/2011 - 01:20 | Link to Comment chump666
chump666's picture

commodities and bond yields both go upward 10yr going to 4%

stock volumes shrinking, bear signals galore.

major reversal building

Tue, 02/08/2011 - 08:37 | Link to Comment firstdivision
firstdivision's picture

Oil is the one that seems to be doing its own thing at the moment.

Tue, 02/08/2011 - 03:28 | Link to Comment hugovanderbubble
hugovanderbubble's picture

17th february MAJOR TURNING POINT

Tue, 02/08/2011 - 08:09 | Link to Comment Sutton
Sutton's picture

I'm long PSDV at 7.22

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