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Bond Steepeners On Fire: 14 bps In 24 Hours
Whether or not the rapid move in curve steepening is driven by a flight from long-dated bonds (and yesterday someone very demonstratively puked on the 30 year, both before and especially after the auction), or inflation is starting to finally be a concern for the bond community (unlikely, as it would be a first: every previous time equity and credit have disagreed about inflation, it was always credit which was proven right), the 2s10s has steepened by a whopping 14 bps in less than 24 hours. The flipside: more cash for the banks. Is it enough? Or, more importantly, will it be enough 2 years from now when the bank CRE whole loan holdings start rolling (hopefully). At least Bernanke has a head start on the $3.5 trillion problem which is contained.
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1987 redux here we come.
Could you comment on what was the sequence of events in 1987?
Archive of Wall Street Week with Louis Rukeyser October 1987 before and after the crash (a must watch)
Wall Street Week with Louis Rukeyser1984 George Orwell redux here we come.
Long Treasury yields backed up while the S&P ran wild.
This time the Treasuries have backed up far more, percentage wise and the S&P has run
far more. Prechter called that 1987 break. Perhaps there is something about his work that makes
his current sell call more credible. 1100 top down to below the last lows. We'll see.
Hansel,
You've said this a few times and while I don't disagree with you, I don't know if I agree because I don't know how you are seeing this particular parallel.
In the 1987 example, the markets fell for a few weeks before that terrible down 25% day. This market hasn't been able to put together more than 6 or 7 down days without buying the dips roaring back in.
I believe that the buy the dips mentality leaves all kinds of air pockets and sloppy stops in place, not to mention the damage overnight down gaps can do.
What is your thinking?
I believe that the buy the dips mentality leaves all kinds of air pockets and sloppy stops in place, not to mention the damage overnight down gaps can do.
I saw a chart today that had quite a few gaps on the nazzer (i don't closely follow that index)...there are a few on the spx, 1040ish and a beauty at 901ish, which is the one i am aiming for....that one gets us to 880 again
I don't think it will happen immediately, but I think the stage is set. In '87, stocks continued higher even as bond yields rose until everything snapped. In the wake of this Reagan formed the working group on financial markets, i.e. the PPT. The scenario in which bonds and stocks sell off simultaneously has been fought ever since.
http://finance.yahoo.com/echarts?s=^GSPC#chart8:symbol=^gspc;range=19861001,19881003;compare=^tnx;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
I hope the chart link works. Disclaimer: Opinions are like assholes, and I know as much about the future as anybody. My thinking is that for a time the stock market might interpret rising yields as growth returning until everyone realizes what higher rates do to a debt laden economy.
Thank you.
The link worked BTW. I was a newbie in the biz in 1986 so I grew some short hairs in 1987. I've always felt that drop was engineered, simply because it came out of the blue and came back so quickly. 12 months later, it was just a bad dream.
Some people made a boat load of money and they knew exactly when to buy. And more importantly when to sell. I don't believe in coincidences in the stock market and luck only works for those that manipulate it in their favor.
A tried and true tactic by those that can move markets is to engineer a drop like that in order to purchase good stocks cheap. I felt the 2008 drop, and the next one coming, were/will be engineered as well.
Just my asshole opinion as well.
I have been thinking about this for way too long a time. You had the government buying, and you had bill gross (who believes in moving with the government). this dropped yields lower than they should. In a common sense way you have to offer yields that would attract foreign buyers in an ever dropping currency. . so I have been slowly adding to TBT as it dropped and looking at TLT for entrance points. Mainly a very common sense trade. the market can not ignore macroeconomics for ever. when the bond market imploded I bought a lot of long term tax free muni's so wanted a nice hedge as I could see the bubble growing
Longer dated Treasuries collapsing... Any guesses on whom Bill Gross has been speaking to today (and about what)?
Isn't this just the reflation trade, following Canada and Austrialia creating jobs.
If reflation is working, rates have to go up, especially at the long end.
Now let me see have stocks priced in any rate rises and inflation into their multiples. Err... no, none, zero!
your reasoning is overly simplistic and you seem to have quite a weird array of positions and "hedges" - there are many other factors to consider.
from an FX perspective, foreign buyers of USD have recently been actively buying dollars to protect their own currency from appreciating (ie selling their own currency and buying dollars). Attractive yields is one component, but 30 year bonds is not where FX resides anyway -- look to short term rates for that (why AUD is attractive right now). To me, it is clear that all the hype about china and asia et al rebuilding their high GDP growth rates based on internal demand is a clear sham. Otherwise, why would they care if their currency appreciates vs. dollar? If anything they'd welcome appreciation so they could buy more stuff from abroad, etc. The fact that they are "defending" their currency is proof that whatever recovery they are experiencing is highly tied to the US consumer's well being. And since we know the US consumer is not well....
LQD is really breaking down. Is IG credit really that much weaker or is LQD just catching up to where credit is?
The level isn't too concerning yet, but the direction/pace are ugly.
Everyone out of the fixed income pool (except for speculative, of course...) It's time to go into equity in companies with massive debt, since paying it back with toilet paper won't be that difficult.
And the dollar is getting non-trashed. This is making me so very tired.
Very good point about the LQD...but then WTF is up with HYG being up on the day??
Head, meet table, y'all will be very close I'm sure.
OT
on BO's prize
Well at least they won't be talking about bombing the moon all day.
IMMA GO AND BUY MYSELF A TEN YEAR TREASURY NOTE, HURR HURR. CANT R'MEMBER A TIME WHEN LENDING MONEY TO THE GOVERNMENT A BAD IDEAR.
Perhaps this (http://www.alacrastore.com/research/s-and-p-credit-research-Standard_Poor_s_Expects_U_S_Debt_Ceiling_To_Be_Raised_Soon_Says_Report-751005) has something to do with it.
The attempts to break above SPY 107 independently of what happens with the DXY and the yield curve are ridiculous... other than for the fact the might succeed...
Someone's taking their marbles to chase risk. Eh, they'll be back before long. The seductive sounds and perfume of inflation linger in the air. Fling yourselves into the dance of the rival tribes! It's the rites of Spring, were all is reborn and renewed! The May Queen is aglow, as the petals of prosperity are tossed aloft. (Or is that an illusion, and this is really more like that one scene from Ju Dou?)
Gross was loudly proclaiming "look at me, I'm buying bonds! Follow me, wee!" Aside from talking his book that audacious display was weak. Ben will buy, buy, buy. 4% on the ten year has proven deleterious effects on everything he is trying to do. All other movements are noise imo.
We saw how Gross had Crecenzi trash talking long duration in Jun/Jul as Big Bill loaded up. Hard to believe Gross feels the need to talk his book. He is the Bond Market (w/a little help from Lucy & Ethyl).
You know the money managers are in "full economic expansion" mode when they start dumping bonds and buying stock. This will not end nicely.
Tyler,
I'm curious if you know the answer to this. What is the SP500 earnings sensitivity to LIBOR? Ie: 100bps = $1 SP500?
Companies levered 4x ebitda with L+400 debt could get crushed when rates rise. In the meantime, it's been a source of earnings benefits as interest expense comes in lower than expected.
Thank you.
I'm curious to know whether you can wipe your arse without permission
It scares me that I now know what 99% of you are talking about.
I have become an economy turd.