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Curve Flattening Pain Back To May Levels
As we have long been warning, the most popular trade in rates over the past year, and the one that Morgan Stanley has gotten virtually all of their clients into, whether outright or through CMS and other contraptions, has been the bullish steepener trade. Well, things have gotten bearish and very flat in a hurry - alas, this trade has now collapsed and is now back to September 2009 levels. When one considers the gobs of leverage associated with this unwind, primarily driven by the 10 Year about to have a 2 handle as a deflationary panic suddenly grips the land, and as vigilantes make it impossible for the Fed not to push the QE 2.0 button, and the completely senseless action in the market suddenly makes a little more sense. In the meantime credit funds are losing tens of billions, and are forced to seek liquidation of other positions. In fact, one very prominent hedge fund is rumored to be selling off parts of its gold exposure to mitigate collateral requirements as it is yet again incorrectly positioned in the treasury curve.
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Nice catch. So how many of us are ready for a 2.50% on the 10's again? Of course, don't worry, that's uber-bullish to the Bubblevisionistas...
Curve flattening implies a slowdown. Not good.
Now whether it is merely a manip. I don't know....worth watching though.
Curve flattening beats curve pancaking.
However, if my deficit addicted gov't is not willing to go into a 12 step debt recovery program, at some point, curve pancaking may make an appearance.
So why QE 2.0? Why not just wait till the 10-yr is the same as the Fed funds rate? Then the Fed can simply borrow the money from itself for nothing and fund its own auctions? By the way, is the ghost of Douglas Adams now in charge of national finances?
Would that be Paulson's hedge fund?
Sure sounds like it.
So will the unwind of steepeners indirectly lead to a sell off in equities? What about REITs? If someone could explain how that works I'd love to know.
Where's Leo now????
Taking a double dip in a frozen pool. He's not able to move his liquidity.
Sure seems like many hedge funds just guess and gamble their clients money based on those guesses. If they are right, they get 2% and 20%. If they are wrong, nice try... next time swing harder.
And so it begins, soon you will have to be 90 yrs old to retire in the US
http://finance.yahoo.com/focus-retirement/article/109936/when-will-you-g...
Solyent Green
Gilbert: [hesitating before killing Simonson] Uh... they told me to uh... to say that they were sorry, but that you had become... unreliable.
Simonson: That's true.
Gilbert: They can't risk, uh... catastrophe, they say.
Simonson: They're right.
Gilbert: Then, uh... this is right?
Simonson: No, not right... Necessary.
Gilbert: To who?
Simonson: To... God.
At this point all I'm hoping for is to be able to tip over in my garden at a ripe old age. Maybe with enough freedom's left that I'm still allowed to knock a deer in the head when it comes after my peas.
The way things are headed, this seems like as much of a retirement pipe dream as the cashed out at 57 and traveling one I used to have planned.
If they want to do a QE2, they better start announcing it now, or the costs will be twice as high. They better do it now as the wheels of the economy are still turning a bit. If it comes to a standstill we don't know if it will start again.
I think the QE2 will be announced in augusts, just before the industry needs to get into a higher gear and a QE2 would be a good booster. If otherwise, it will be just waiting till the fumes are out of the tank and the engine stops.
On the one hand I'd propagade austirety on the other hand they all should do a new QE. If they all want their deficits to be halfed by 2013, I don't see why that deadline couldn't be pushed down the road to 2016.
Either way, the world ends in 2012 so why not make it the best of times :)
they are going to have to sell QE2 like they did for QE1 so the economy needs to stop or an emergency created to let them do it otherwise I believe certain politicians and bankers will end up with their pictures in a deck of cards every American will own .
When they announce QE2, it will target some asset other than Treasuries with the purpose of tightening the spread. There is no reason to target Treasuries when the 10yr is threatening to crash through 3%. QE1 was all (80%) about MBS, because demand was drying up and spreads relative to Treasuries were showing signs of blowing out. When QE2 happens, spreads will narrow and the yield on Treasuries will rise (simliar to what happened at QE1).
The problem now is the target asset should be Euro-denominated sovereign debt, but that is about as politically dangerous (US-wise) as one can get. I wonder if TPTB in the US are asking for some quid pro quo to help justify or provide cover, and if the US "ask" is too high.
The Fed's recently announced currency swap lines would help solve the current problem in Europe, but I can't find signs of any draw on those lines in the lastest Fed reports. Why?
Just my speculation, but could the Europe-wide embrace of austerity be the region's only option (or next best option) other than the Fed swap lines?
Tyler:"...and as vigilantes make it impossible for the Fed not to push the QE 2.0 button"
The top 1/10%(0.1%) has already been bailed out and will be unaffected by massive deflation.
Deflation is more likely (permitted) simply because it now will not hurt the ultra rich that were holding the bonds on the corporations that should have defaulted in 08-09.
In fact, with deflation, their relative wealth will grow exponentially.
Therefore, these "vigilantes," "teabaggers," ironically, serve those who would enslave them.
___
I ascribe to this view as well, I see a deflationary crash happening in slow motion between now and about late September, and hitting a violent downward spike around that time. It'll be 2008 all over again. Republican landslide, political/fiscal gridlock not seen since 1994. Fun times ahead.
The people in the know profit on the way up and and way down.
Eventually, all the dead cat bounces will be done and there will be basically nothing left to short... the people in the know will go in hiberation for quite a few decades while bottom dwellers fight out who is going to be liquidated.
The world needs rich people. The more Cayennes you see driving, the better it gets for everybody.
Yeah, that's wonderful. Don't forget that piss tends to 'trickle down' as well...
That is how I have thought of "trickle down economics". Thanks Reagan! /sarcasm off
Exactly right Muir
I think TD has confused his terms here: if "vigilantes" = Treasury bond vigilantes (i.e. deficit hawks), then deflation is a positive. I also agree with Muir about what serves the plutocrats' interests best. FWIW.
Here is some help for those who may not understand the implications of a flat yield curve, which can lead to an inverted curve, which is worse and looks like where the US is heading.
Normal yield curveFrom the post-Great Depression era to the present, the yield curve has usually been "normal" meaning that yields rise as maturity lengthens (i.e., the slope of the yield curve is positive). This positive slope reflects investor expectations for the economy to grow in the future and, importantly, for this growth to be associated with a greater expectation that inflation will rise in the future rather than fall. This expectation of higher inflation leads to expectations that the central bank will tighten monetary policy by raising short term interest rates in the future to slow economic growth and dampen inflationary pressure. It also creates a need for a risk premium associated with the uncertainty about the future rate of inflation and the risk this poses to the future value of cash flows. Investors price these risks into the yield curve by demanding higher yields for maturities further into the future.
However, a positively sloped yield curve has not always been the norm. Through much of the 19th century and early 20th century the US economy experienced trend growth with persistent deflation, not inflation. During this period the yield curve was typically inverted, reflecting the fact that deflation made current cash flows less valuable than future cash flows. During this period of persistent deflation, a 'normal' yield curve was negatively sloped.
[edit] Steep yield curveHistorically, the 20-year Treasury bond yield has averaged approximately two percentage points above that of three-month Treasury bills. In situations when this gap increases (e.g. 20-year Treasury yield rises higher than the three-month Treasury yield), the economy is expected to improve quickly in the future. This type of curve can be seen at the beginning of an economic expansion (or after the end of a recession). Here, economic stagnation will have depressed short-term interest rates; however, rates begin to rise once the demand for capital is re-established by growing economic activity.
In January 2010, the gap between yields on two-year Treasury notes and 10-year notes widened to 2.90 percentage points, its highest ever.
[edit] Flat or humped yield curveA flat yield curve is observed when all maturities have similar yields, whereas a humped curve results when short-term and long-term yields are equal and medium-term yields are higher than those of the short-term and long-term. A flat curve sends signals of uncertainty in the economy. This mixed signal can revert to a normal curve or could later result into an inverted curve. It cannot be explained by the Segmented Market theory discussed below.
[edit] Inverted yield curveAn inverted yield curve occurs when long-term yields fall below short-term yields. Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve has indicated a worsening economic situation in the future 6 out of 7 times since 1970.[citation needed] The New York Federal Reserve regards it as a valuable forecasting tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. This was seen in 1998 during the Long Term Capital Management failure when there was a slight inversion on part of
The Coming Storm: The bulls are ignoring the economic realities
http://finance.yahoo.com/banking-budgeting/article/109942/the-coming-sto...
Good thing the banks can 'mark-to-myth'.
Won't a flatter curve decrease bank's profits as well?? (Especially for the banks in the real world (non-PDs) that can't borrow at 0%.)
It would be a good guess that whoever this so-called hedge fund is that they are/were exposed LONG PAPER!
We can always eat the rich...once.
We can grow fields on their carcasses, many times.
But then you would be rich, and those without fields would come to eat YOU.
Pronoun was "We." Que?
most of the meat is poisened by the botox. I'll skip that plate, thank you very much :)
Zombie bankers?
pfffft
CMS = ?
http://en.wikipedia.org/wiki/Constant_maturity_swap
Thanks.
Constant maturity swaps
tHE DOWNWARD MOVE IN GOLD CONFIRMS THE RUMOR THEY ARE SELLING GOLD
The downward move in gold confirms the rumor they are selling PAPER!
BP PLC /quotes/comstock/13*!bp/quotes/nls/bp (BP 26.89, -0.13, -0.48%) warned Monday that waves kicked up by the storm could hamper their efforts to increase the volume of oil collected from their blown Macondo field well some 40 miles off Louisiana.
I don't believe in QE2, at least not this year. The pols are starting to fear the backlash. And Ben is ultimately another pol.
Besides, the fed funds rate is already down to 0.16 from its peak of 0.21 last month, despite the slow shrinking trend of the monetary base since February. In other words, banks' preference for cash within their individual portfolios is growing faster than the Fed is draining their collective cash pool. It would take a real clod to imagine that QE would transfer to the real economy in this already over-liquified yet investment-adverse environment. It could perhaps create a small, short-lived spike in equity prices, but I think that game has played out.
Very slowly, the tide is turning in favor of more conservative fiscal and monetary policy. Which is good news for the long term, but means pain in the short term. Like it or not, austerity is coming to your neighborhood, if it hasn't shown up already.
Let me get this straight, the pols are fearing backlash from more QE but austerity is coming to my neighborhood with November midterms coming up.
I'd rethink that premise if I were you.
Anybody having back pain, insomnia, or having difficulty making the doughnuts in the morning?
Holy lack of volume in todays market. Were all the traders at the pool today?
word... that was a test btw :)
I believe this article by Krugman is the shot across the bow for QE 2.0. Stay tuned!
http://www.nytimes.com/2010/06/28/opinion/28krugman.html
How does one justify this with an understanding that each dollar of deficit causes a further drag on the Economy (Per the Economist, last week). Looking at what the Administration has chosen to 'invest' our Stimulus money in (at Recovery.gov), QE2 would be no more that a spitball in a cyclone; and at that, it would come back to haunt us in the generations to come.
Next generation is going to be called "GenerationBroke"
Perhaps the NY Fed doing agency MBS coupon swaps (http://www.reuters.com/article/idUSN2825877120100628) is part of reason for rally in 7-10 year sector.
Also quasi QE as it forces street to buy $2B to $3.5B in order to maintain duration
Well, don't state budgets come in on 7/1? The point is they almost have to bail out the states before the elections. Wouldn't that be QE2?
Print baby, print! It will be the excuse du jour!
sounds like an old girlfriend
At least John Maynard Keynes wasn't a total idiot. He believed in using a budget SURPLUS to try to stimulate the economy. On the other hand, Ben Bernanke is trying to promote economic growth via DEBT and FIAT currency. That in my book certifies Ben as a TOTAL idiot.
Heaven help us all.