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Is The Bulk Of Inflation Now Priced-In (Even More Than Meets The Eye)?
The Treasury Curve is much steeper ‘relatively speaking’ than even its high absolute levels imply – is this what Gold is reflecting?
Point 1 - The incentive/cushion for putting on steepener trades is at its lowest in 8 years (the last business cycle). This duration-neutral (pure curve play) level is considerably lower now than it was the last time the rate differential was as steep (Point 5). Another way of judging this is to consider the 2s10s steepener a crowded trade as all the carry has been crushed out of it.
Point 2 – The 2s10s curve has steepened dramatically in the last 6-9 months but if we look at Point 1 on the chart, the duration-equivalence has not changed much…
Point 3 – The same range of steepening we saw in Point 2 was also seen in Point 3’s period and look at the massive compression in the carry cushion on the steepener as rates dropped in the short-end dramatically. The convexity of the curve and the new lower rate environment we are in means we must judge the curve on a different (not absolute) basis.
Point 4 – As 10Y rates dropped with deflation worries in Dec 08 (and the curve flattened), steepeners felt pain and unwound we suspect. More critically to us is the fact that we have moved back up to the same steepness and close to same levels but due to convexity the carry cushion has been depressed considerably – implying to us at least that the curve is considerably more ‘rich’/steep than the absolute history would imply.
Point 5 – This period has similar levels of both steepness and absolute level in 10Y and we note that the carry cushion for the duration-neutral curve is considerably higher. This tells us that there was far less inflationary worries (curve steepness) priced into reality than we are currently seeing.
Point 6 – The trough in carry cushion (see other chart also) was above the carry cushion we have seen in the last six months. Does this imply a more crowded inflationary bet on the yield curve.
Does this apparent over-steepness and great-inflationary pricing relative to duration-neutrality imply recovery being priced into bonds despite the relatively low rates? Or is this cost push or currency devaluation inflation (rather than demand pull) echoing the move in gold recently. Add to this the fact that USA protection costs have risen recently (which portends a higher risk of dollar devaluation) and we worry that the worst side of inflation is being priced more into the curve than perhaps many would believe.
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Ummmmmm.........
Fucked if i know.
Next question?
Looks like a trap to me. Remember, people, strong hands on your PM's.
On reconsideration, the news from China regarding their stated willingness to default on commodity derivatives, along with the reports that Chinese state media is now encouraging Chin-sixpack (sorry, couldn't resist) to buy physical precious metals, along with the other announcement that China is willing to buy SDR 50 Billion in IMF bonds, maybe we're gonna run a little while.
as long as SPX is above 500 and the 30 yr yields less than 12%, it's all bullshit.
Sooooo Julian Robertson made alot of money and can now cash out?
...or maybe your point is the carry cushion just needs some Zoloft if it's so considerably depressed?
Another perfect Perpetual Motion Machine designed by Bernanke, Geithner, LLP.
Despite gold rocketing to new highs....
1. Investors are still "fleeing" to the safety of dollars and U.S. Treasuries
2. Unlimited deficits can be financed to infinity with Stimulus II, Stimulus III, Stimulus IV, etc., etc.
3. Foreign creditors easily held at bay, watching the value of their Treasury holdings soar day in, day out.
4. Eventually these absurdly low interest rates will reach near zero, forcing Joe Sixpack, Granny, and every major institution to eventually search out higher yields by investing in U.S. stocks.
5. As stocks rally, bond prices will back off, but only temporarily, as Goldman will come in and sell the tape down to the 200-day EMA again and power another magical flight into dollars, bonds, etc.
Around and around we go......
"1. Investors are still "fleeing" to the safety of dollars and U.S. Treasuries"
not exactly....china announced today the purchase
of 50b usd in sdr-based imf bonds based on a
basket of currencies...
although the amount is small and is only a partial
solution for dollar independence, this is
fundamentally big news....china is slowly but
surely liquidating dollar holdings just as it
has been doing all year to the tune of 50-100 usd
per month.....
russia and brazil will pony up 10b usd each...
Yup, Timmy G and Bernie B are doing a juggling act of driving up equities / corp debt so companies can raise cash. And then before the USD goes too low or govvie rates go too high, Timmy and Bernie yank liquidity to drive people to buy bonds from Uncle Sham.
At some point though, there'll be enough deleveraging that Timmy and Bernie won't be able to herd the money where they want, and we'll get a big dollar fall, or interest rate spike, or some other nastiness.
Good stuff. I had never thought of this before. Makes me think twice.
http://thefundamentalview.blogspot.com/2009/09/china-and-buzz-of-pending...
derivative repudiation, with repercussions to oil and US banks, + today's marketwatch report of HK taking physical possession.
Simpler terms: abandon ship, take transportable wealth, tell the others.
No matter how high unemployment goes.
No matter how bad the prospects for a v-shaped recovery.
You simply cannot stop the "Resilient Consumer" from whipping out the plastic and start spending like madmen.
Add Stock Charts To Your Blog
"Retail Metrics, which tracks the monthly figures, said its index of the monthly sales numbers showed a 2.3 per cent decline compared with the 4-5 per cent falls seen in recent months, the best performance for the index since September last year."
YAHOO, green shots !!! Decline is good!
I have even better Green Shots idea. Let's compare all of the numbers to the worst month of the year or even better to the worst month of this business cycle. WTF cares about annual year over year comparisons, those are boring and unpatriotic.
SEC promises to wake up, well we all are aware of their "promises." -
http://www.bloomberg.com/apps/news?pid=20601087&sid=azaZYKBs47Uc
By the way prior to the update of the article it only mentioned the SEC promise to go only after FOREX robots. I guess that statement wasn't politically colorful enough.
How reliable are these observations? Comparing today with any prior period is suspect to me. The Fed is buying 1.75T of coupons. That has never happened before. So with that as a back drop how can we look at this and make sense of it. History is a poor guide when you change the rules.
agreed....apples need to be compared to apples...
+1
Exactly. More specifically, I feel that there is so much risk out there that these yields are not worthwhile. I have successfully preserved my capital for more than two years now but I am left with all cash denominated in dollars. For practical reasons too numerous to list I don't have confidence that PMs or other currencies are adequate protection. I feel like the Huns have come to town and there is no place to hide.
Great point. But has the mentality changed?
CHinese way of combiting unemployment:
"The founder of Mengniu Dairy, China’s largest milk producer, has been replaced as chairman of the company’s main subsidiary by a state-appointed executive, in the latest example of what analysts believe is a creeping renationalisation of some parts of the economy."
http://www.ft.com/cms/s/0/252ab3ac-98b4-11de-aa1b-00144feabdc0.html
I guess the fun part of credit crunch is not over yet. You ether employ those workers or .. ELSE!
That may have more to do with the fact that the old chairman was in charge when they were selling melamine laced milk.
I was just saying the other day, I miss the taste of melamine in my coffee...
I though those were hanged a while ago. I guess you ve got a point, shouldn't take the Financial Times report at the face value.
Melamine, it gives you WINGS!!!
No,no,no. Melamine will kill you. Oh yes, I see, and then you get the wings. I wasn't looking at it in Christian terms. .
so much for slowing down MBS purchases.
Gross purchases from August 27 through September 2: $25,650 million
Net purchases from August 27 through September 2: $25,650 million
http://www.newyorkfed.org/markets/mbs/
Put otherwise, the T coupon auctions next week wil have a strong bid.
And of cause the Chinese market was up due to:
"
FT, By Kathrin Hille in Beijing
Published: September 3 2009 10:29 | Last updated: September 3 2009 17:59
More than 1,000 residents of Urumqi, the capital of Xinjiang, took to the streets on Thursday demanding the resignation of the Chinese region’s Communist party chief."
Guess what was the official response? THE party will support & regulate the stock market... so it could only go up in rather predictable manner; those were not the exact words but rather market interpretation of an official statement; must be about the time for 'em to implement yet another 500bl stimulus.
Sure sounds familiar dosent it?
You ve got to love these unallocated »clearing« accounts. They ll SURELY come good on delivery of clearing you out. This is much better than all the algo + dark pools combined.
Is steepener a word?
Is a credit swap a financial tool?
Should premarital sex be encouraged? I'm sorry I'm bored.
George, did your rabbit have a name?
My dear pet rabbit. I don't want to talk about him. My father quantitatively eased him into a stew.
All banking crises have been remedied with steep curves, banks sole purpose is to take liquidity risk.
The fact that short term rates are practically Zero renders youre observations worthless. There is no curve shape just outright 10y exposure. The curve will remain steep and probably see far greater steepness as the term premium increases and incresae as currency debasement risks become greater and greater worries.
All banking crises have seen steep curves to facilitate the rebuilding of capital within banks by them persuing there primary purpose as liquidity providers - borrow short lend long.
The shape is a function today of 10y levels as short rates are zero and will stay there for a considerable period 2y +.
The curve will go beyond historical speepness as the term premium required to cover the currency debasement risk will continue to grind higher. Nothing to see here ...please move on
M2 money supply
M2 Weekly Change $-5.9 B $-28.1 BI believe it's a reflection of coming currency devaluation -- that is, the devaluation of the U.S. Dollar.
Recall the recent talk of China threatening to reneg on commodities futures contracts.
http://in.reuters.com/article/oilRpt/idINLT45490720090829
I believe this is a reaction by China to the Comex's sudden change in rules, which would allow the exchange to supply shares of the GLD ETF instead of physical gold bullion. See Trace Mayer's article for details: http://news.goldseek.com/GoldSeek/1251815214.php
It appears that the Comex will be in a defacto state of default for the September contracts. It will be impossible to hide this and will propel gold upward, exerting strong downward pressure on the dollar.
What is this 'Comex' you speak of? Oh, you mean the Conex / Crimex!
I love #23: unallocated, oh dear. So they're now transparently operating a fractional reserve system. I consider that even more of a last line of defense than redeeming with paper from GLD. How nice. You go Ponzex, you go!
ECB came to the rescue of Deutsche Bank when physicals called bullshit on their paper. Place your bets on who's going to come to the rescue this time.
Oh yeah, and whenever you read the world 'sale' coming from a CB gold stash, replace it with 'lease'.
It is indeed a crime syndicate. The really interesting thing will be silver, because the Comex loonies sold enough silver short contracts to make anyone's head spin. So, even if by some fantastic move they could come up with the necessary gold bullion for contract fulfillment, they'll miss on supplying silver by a mile. Silver will be a gigantic suprise for investors. The real pricing ratio of gold-to-silver is about 8 to 1, not the Comex's magical 60 to 1.
You ve got to love these unallocated »clearing« accounts. They ll SURELY come good on delivery of clearing you out. This is much better than all the algo + dark pools combined.
Though execution may seem »interesting« - it was allways THE settlement behind.
sudden change in rules = confiscation 2.0 (more precisely 1.8945).
the bears might get it right for all the wrong reasons ...
3. Foreign creditors easily held at bay, watching the value of their Treasury holdings soar day in, day out.