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CRT's 2011 Forecast For The All Important Treasury Market, Including Tail Risk Scenarios
From under the always interesting pen of CRT's David Ader and Ian Lyngen comes the firm's 2011 outlook for the Treasury market. The summary: "From the supply and demand perspective, there’s QE lite and QE2 vs. knowledge that at some point they’ll stop, eventually hike, and follow suit possibly on asset sales. (In point of fact we doubt the Fed may EVER do asset sales, but rather allow their assets to simply mature/redeem and stop reinvesting.) In any event we don’t see this as a 2011 threat but it’s fair to say that any bear market will be more substantial than whatever bull market we can connive. The problem is positioning for the latter when the former hangs as an inevitability someday." This dovetails perfectly with what we have been saying: ever increasing supply of USTs (potentially hit up to $2 trillion in 2011), will be offset by an ever more ravenous Fed monetization. Should rates continue to rise, the moment when this dynamically unstable balance reaches its tipping point will come far sooner than most expect. If, on the other hand, new signs of economic weakness-cum-deflation emerge, and if Rosenberg is proven right for the second year in a row, the Fed may just be able to postpone the point of "inevitability" as defined by CRT. Much more nuanced observations inside, which also include the firm's forecast for possible "Tail risk" events.
In summary, here are the bullets of things CRT anticipates will be the key talking/trading points over the course of the year in rates, which in turns drives (or should) all other markets:
- Fed buys $850-900 bn through H1, QE-lite thereafter, so ongoing $30 bn-$35 bn buying per month in H2
- Tax plan adds $400 bn per year to deficit FY ‘11 and ‘12, $200 bn if you already expected Bush tax cuts to hold. Debt Ceiling fight (April-May) comes sooner
- Auction sizes will remain intact, no reductions
- The Funds rate remains at 0-25 bp for all of 2011
- Core Inflation continues to surprise to the downside, under 1% YoY
- UNR stays over 9% in H1, sluggish improvement thereafter
- EU showdown in H1, Dollar strength vs. the Euro, target 115-ish
- European growth surprises to downside
- GDP growth hangs in 2.5-3.5% range with tax stimulus upside risk
- Both Dems and GOP try to outdo with deficit plans, fiscal conservatism is theme from Washington making further stimulus an unlikely prospect
- FOMC becomes more hawkish with Fisher, Plosser, Kocherlakota, as voters
- 10s spend bulk of year from 2.65%-3.65%, early strength vs. Q4 weakness
- Municipal ‘crisis’ an ongoing theme, but revenue side stabilizes and forced cutbacks put stress on public employment
- Commercial Real Estate losses, delayed foreclosures on homes hit, banks have mini crisis keeping them ‘engaged’ in carry trades, risk aversion
- Health care bill amended to make it 1) understandable, 2) more acceptable, 3) less costly…GOP twists Obama’s arm on this but vs. what?
- NO Moody’s and/or S&P downgrade of US’s AAA credit rating
- Fannie Mae and Freddie Mac restructuring/home-loan modification program
- TAIL RISK SCENARIOS?
- Real nuclear showdown with Iran, oil spike
- North Korea attacks/provokes South Korea, regional crisis ensues, China quells the North and becomes de fact regional super power... South Korea and Japan increasingly 'Finlandized'
- Spain and Portugal follow Greece and Ireland, EUR hammered to near par, Germany/France say enough and force default, deep haircuts, Euribor spikes
- Strong US recovery but Fed easy so curve steepens 2s/10s to 270-300 bp and then flattens sharply in H2 as hike becomes likely.
Much more in the full report, which can be procured from your friendly CRT sales guy.
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"Spain and Portugal follow Greece and Ireland."
That is not "tail risk" that is certainty.
For many readers of zh this one is a no-brainer. But for the policymakers and to the most of the market participants filled with hopium and conventional wisdom this is STILL something they ignore and see as a once in a millennium type of event. Those poor bastards just don't get it that it just might be next year when the impossible becomes possible.
You can smell Iran ain't tail risk either.
rate bitches ... I smell 10s > 5% this year ... and the 3Bs running for their lifes
Which means necessarily that you're a huge bull on US economic performance, predicting GDP growth of perhaps 6%?
and the attack on the little man continues
http://www.telegraph.co.uk/finance/economics/8212889/Let-savers-take-the...
Let savers take the hit if banks fail, urges Policy Exchange Banks should offer customers two types of deposit account, one with a blanket guarantee that pays little interest and one that leaves savers exposed to losses, according to the terms of fundamental reform proposed by Policy Exchange, a think-tank.Sounds similar to the original idea behind time vs. demand deposits.
Yes, you are right and it's going to happen
2011: The continued, slow death of money as we know it.
http://therookiecynic.wordpress.com/2010/12/14/when-money-dies/
Any transition from bull to bear market will take 1-3 years as it has in the past. The treasury market is not going to flip-flop overnite.
The treasury market is not going to flip-flop overnite.
It is now common to see it flip-flop (moves of 1 point+) on an hourly basis.
Sorry, I meant over a longer term. You are correct; it is reflected in the MOVE index. Jumping all around...
Extreme volatility is required to have true casino-like "action".
Otherwise it is just a "market", where the skimming is more difficult and time/resource consuming.
Offshore might be a superior alternative to equities, specifically the Swiss Franc.
Personally, I think what will happen is what we saw Friday and so far today.
Namely, people who left bonds . . . will return to them. There will be no growth. It is scared money and scared money (the vast majority of money is rightfully scared) will never, EVER go to Gold. Nor will it go to stocks.
It will go to US bonds, as it always has. There, it will be protected from default by printing and from inflation by perpetual oil choked zero growth.
and scared money (the vast majority of money is rightfully scared) will never, EVER go to Gold.
Are you joking?
Go to Germany and try to find a safe deposit box that is not crammed full of gold.
No, I think maybe it would be better if you take a profile of all over 65 investors at mutual fund companies and find how many move from bond funds to gold funds. Get back to me when you have the verifiable results.
I think maybe it would be better if you take a profile of all over 65 investors
OK, now you are at least adding a demographic qualifier to your original, absurdly untrue statement.
My bad. The 65 stuff was in another thread.
Of course most wealth is held by the elderly so it is they who you have to deal with when convincing them that gold will pay them a monthly interest payment.
This is overall an excellent pro research piece, and I agree with almost everything in it (granted that's easy to do when the arguments are so balanced).
But there's one glaring mistake: the claim that the Fed has been and will be buying more than total net issuance of Treasuries.
Between the close of the day Nov 10, the last working day before QE2 launched, and close of the day Dec 15, the most recent data point for Fed holdings, Treasury net issuance was $188 billion, while Fed purchases was $115 billion. That leaves $73 billion of net issuance to the market in a little more than a month, which is a long way from CRT's claim of less than zero.
Granted, total net issuance happened to be higher than usual in mid-November to mid-December. But still, the average total net issuance, before Fed purchases, was $133 billion a month in January-November. That's still more than $115 billion. With the recently agreed payroll tax cut, total net issuance is obviously going to go up, not down. So there is no reason to expect the Fed to buy more than or even all of total net issuance.
Lots of Numbers in a General Direction
I see the comment repeated throughout the financial world, "A hike in rates will coincide with GDP growth."
As prices of Treasuries go down it attracks the price fixing of the FED. I am very sensitive to the reality that my business will continue to grow through 2011 because the consumer driven economy has been lulled back into a sense of ease. As it has become almost impossible to have a conversation with anyone about the perils of debt, the Federal Reserve System, bank bailouts, etc ... what is clear is the psyche of the consumer is affected but largely unaltered and the irrational market will continue unabated.
Government deficits will continue to increase to compensate for lower taxes and increased services well into 2015; while the money is being funneled to specific corporations through the FED thereby creating greater wealth accumulation within a finite group. The FED intends to continue to make purchases through 2011 and keep short-term rates low, thereby price fixing the market.
I can sell really bad paper to the government and buy somewhat bad paper because the FED will provide a liquidity backstop to the financial system to ensure that the megabanks never go bankrupt.
As the zombie banking model of Japan and Thailand lays waste to the US economy, it seems clear to me that the individual parts of the system will continue to operate until a major change is expected from a population that becomes enslaved in debts that cause a change in political will (Tea Party is just the beginning).
2010 Budget projections: The tax receipts of $2.4t ... and spending of $3.6t = $1.2t deficit.
2010 Likely projections: Tax receipts of $2.2t ... and spending of $3.9t = $1.7t deficit.
Look for 2011 to be exponentially worse. The governments balance sheet is tied to the US economy. While GDP will continue to rise in 2011 (3% growth target) the tax receipts will decline as the concentration of wealth creation is in disproportionately under taxed environments. Workers pay 30%-50% because they are too stupid to say no to the slave masters ... Capitalists pay 15% because politicians are more than happy to screw over the non-voting starving homeless morons. Unemployment will continue to increase steadily as we grind through the unintended consequences of massive FED intervention in the natural business cycle.
2011 tax receipts will decline even as GDP increase. Expect $2.2t ... and spending to go up to $3.9t = $1.7t deficit.
A 50% increase in the deficit will show that the US economy is in a downward spiral, in which inflation in the commodities and equities markets will reflect the reality that the government is headed for actual bankruptcy.
The way to make money in America, or any capital centric system, is to look at the long-term trends. The battle between those who have (pensions, 401ks, inheritance) and those who don't (living paycheck to paycheck) will intensify.
The ship is sinking. And government is only begining to discuss the practicalities of running a deficit that exceeds 10% of the GDP. Increasing the deficit to fuel GDP growth (Keynsian economics) inorder to sustain the standard of living of an older generation that was "promised" social securtity (think philosophically not literally) will be eviscerated by the growing discontent of taxpayers (workers who vote) who can do basic math.
Bankrupt is bankrupt.
Asset allocation to wealth with intrinsic value
GDP will go up in 2011, an increase created by price fixing in treasuries (and other maerkst) combined with government deficits. This trend will continue as long as taxpayers allow the government to do this. How long can you feed someone antifreeze before they figure out that it isn't good for them? How long can the FED attempt to "create" inflation before the reality that the cost of living has destroyed the economic balance between labor and capital?
The FED acts to protect the financial oligarchy of the megabanks and nothing else. Their feigned speeches about market stability, low unemployment, and controlled inflation are political hyperbolye to prevent Congress from revoking it's monopistic charter on the printing of the US dollar. Man has a right to choose to be a slave, and that is the economic system we have.
Rates will rise because the FED cannot price fix an $82 trillion worldwide bond market for a period longer than the average consumers ability to eat. Riots are already a reality in many countries experiencing the intial pain of austerity and other fiscal checks on central banking systems.
(DEBT) Wickedness never was happiness.
GDP will grow, interest rates will remain low, unemployment will steadily increase, tax receipts will decrease, government deficits will compensate, and the real return on treasuries will continue to be negative as long as the FED controls the punch bowl. It started in 1913.
Because the more debt a nation (or a person) has ... the easier it is to take their money.