This page has been archived and commenting is disabled.
Is Curve Flattening On The Way? Weakest 4 Week Auction Since August 2009 Closes At 8 Month High Of 0.15%
The just completed 4 week auction closed at the worst level since August 2009: the Bid to Cover of 3.58 and the High Yield of 0.15% were the weakest since mid-August. As the chart below demonstrates, since last closing at 0.000% on January 26, yields on the 4 week have spiked, making life for Ben Bernanke increasingly difficult. This also means that the cost for massively leverage primary dealers who sell the front-end and use the proceeds to purchase equities is starting to become increasingly prohibitive. Watch the 2s10s and 6m30s for an indication if this is actual broad tightening, or just a curve shift wider overall.
»
- 5491 reads
- Printer-friendly version
- Send to friend
- advertisements -
staged market crash in the making. They can't raise rates or they kill what little rebound in the economy they have been claiming. Only way to fix this problem if for teh FED to exit the S&P Futures buying business. One has to think this is why they are dumping C shares alarmingly fast at market orders. Their net profit will be no where near what they claim on Citi.
What is interesting is this spike on the completion of the MBS buy.
In broad terms, action to protect the USD should take the form of the FED tightening (Reducing the money supply). But, the application of traditional FED tools, as applied to T debt issuance, no longer applies. Unfortunately, beyond a certain leverage point, the FED cannot control rates as they have in the past. It will be market driven, or in other words non-market (no buyers) driven.
This is the big show. The Government must fund its debt, or a point is reached when payment delays (a tactic used at the state level at this point), can no longer be sustained by Treasury in writing checks. Given the revenue and deficit levels, at some point Treasury will be unable to pay its bills. So when will the FED recognizes the debt cannot be funded (sold into the market) in relation to controlling interest rates (bond market). The FED will have to act. Hence QE2.
The real question is how will the FED recognize the danger in time to take effective QE2 action that supports interest rates. It is clear that their old models no longer apply. I know if the FED announces another QE program, long term T buy program, this is a trigger point for capital outflow from the US for many account managers. Essentially, the white flag of defeat. The interesting thing is what will it do to the USD?
With QE2 what I am really interested in is how does the FED describe the reason for the action? My guess is some reference to rates, but it will not pass muster with the current size of the FEDs balance sheet, and hints of tightening (MBS RR) in 2010. An interesting turn of events given the amount of liquidity in the system. A clear indication that the "crisis" is not over. The raminifactions are that the Administrations budget for FY2010 is not sustainable without further destruction of the USD.
From a pragmatic standpoint, failure to take prudent fiscal action by the Administration will create hazard in terms of new investment. Put another way, the Obama plan (Budget) is a no growth strategy.
Mark Beck
Raise whose rates? Suppose that Treasuries crater, everyone selling, using the proceeds to buy corporate debt and equity. As I recall we have been told for two generations we don't need the stinking government so let's see if they have the balls to test that.
Once one abandons the idea the Treasury rates are the benchmark, which will come when AAA then Aa then maybe most CDOs trade at a lower rate than Treasuries, then the real bull market can start.
Who cares if the Treasury has to pay 7% or 20% interest or whatever if XYZ corp can borrow at 3%? Or something like that. For something like that is the logical conclusion of where we have been going for 30 years. It may take another 30 to get there, I don't know. Could be this summer.
So if the curve flattens, what will happen, and how do I take advantage of it as a trader?
reduction of more complex analysis: sell short anything widely leveraged. it would be a huge deal if it comes to pass.
Could we possibly be on our way to an inverted curve? Now that would be sweet baby, just sweet.
Yea, I'm wondering the same thing...
May you please further explain the idea
thankyou
Countdown to QE2
Not right now. The Fed is likely to be better off letting asset prices deflate and attract flight to quality demand in the near term.
Extending QE to another version right now may put even more pressure in the yield curve, as inflation expectations from money printing (dollar devaluation) become more acute.
A countdown is correct... the open question is the timing. I'm thinking our "leaders" will provide another stick save and have the Fed pur open the spigots about 6 weeks before the November mid-terms this year.
Should the FED change the game it'll take between 3-6 months for the street to figure out how to profit from it. Add another 2 months to announce and implement. So if the FED doesn't make some kind of announcement by mid-May it's game over.
Not if it's a cycle of the same game, especially when many investors are anticipating that announcement.
I do agree on some type of lead time-- otherwise the Obamas/Dems in power may get a lot more mileage by announcing the firings of Summers/Geithner, etc. than, hoping that the stick save kicks in at the right time.
damn that is close or right on the 3 month yld- this should scare the shit out of people. quarter is ending at same time so maybe it will hold together another 2 days or until next auction
'Ask yourself whether the dream of heaven and greatness should be waiting for us in our graves - or whether it should be ours here and now and on this earth.' -Ayn Rand
'I may be going to hell in a bucket, babe, But at least I'm enjoying the ride.'
-Grateful Dead
'And the LORD said to him, Go through the midst of the city...and set a mark on the foreheads of the men that sigh and that cry for all the abominations that be done in the midst thereof. And to the others he said in mine hearing, Go ye after him through the city, and smite: let not your eye spare, neither have ye pity.'
Ezekiel 9:4-5
Sighing and crying it is then!
Doing a quick peek at the WSJ, FT and Barrons that had stacked up while on holiday for a week, one wonders why there isn't a Comic Code Authority regulating same for their content is clearly inappropriate for more impressionable readers.
The pablum narrative is certainly striking up the band, banks returning to profitability, GDP ramping, and the consumer spending as all signs of a V-shaped, scratch that, nascent, scratch that oxymoronic jobless recovery.
Ah the banks. Soon the debate will fall on the continuum of a double-dip caused by the counterproductive populism of bankster bashing versus the political palliative of misdirection through scapegoating. Like most debates in today's public arena, the magician's ability to get folks to ask the wrong questions belies the need for coherent answers.
The name of the real game is this : 'Failure to liquidate the insolvent banksters has led to the liquidation of a large part of the productive economy.A taxpayer financed bailout of rich folks' bad speculative bets has resulted in zombie banks and zombie customers... a fiscal tide that lifts no boats.' (AM Rule #7)
At no time to their hands leave their arms folks; the middle class for their next trick as the 'vanishing bird' smashed at the bottom of the now empty cage.
How smashed you ask?
Well turn the page back to ancient history, say April 12, 2009, when the FT reported: 'Many, including the IMF, expect total global credit losses to approach $4,000bn as the economic slowdown means that more traditional forms of lending become toxic. Assuming banks account for three quarters of losses, and they have already torched $915bn, according to Bloomberg, that equates to 14-odd years of revenues.'
It was around this time that the Federales proclaimed the writedowns will be discontinued until morale improves.
And yet much like the old chestnuts of 'page views not profits', and 'deficits don't matter', the kicking the can , ostrich-arsed, 'don't look at the marks behind the curtain' approach won't and can't change the facts on the ground.
That truth being the banksters are still too bankrupt too go broke.
How broke you ask?
Here's a real simple example. Consider just the off-balance QSPE of three of the too-big-to-jail banks:
Smells Fargo
Total Qualifying Special Purpose Entities(09/30/09): $1,796,209,000,000
Total On Balance Sheet Assets(Grant's 03/19/10): $1,262,354,000,000
Total Tier 1 Capital as a % of QSPE : 5.2%
Citigroup
Total Qualifying Special Purpose Entities(06/30/09): $828,300,000,000
Total On Balance Sheet Assets(Grant's 03/19/10): $1,856,646,000
Total Tier 1 Capital as a % of QSPE : 15.3%
J.P. Morgan
Total Qualifying Special Purpose Entities(06/30/09): $574,000,000,000
Total On Balance Sheet Assets(Grant's 03/19/10):$2,031,989,000,000
Total Tier 1 Capital as a % of QSPE : 23.2%
So in other words, not counting the VIEs (Variable Interest Entities), which are also held off-balance, if Smells Fargo's QSPE's are, in actuality, worth less than 94% of par then they have no Tier 1 Capital, using the 'fingers and toes' accounting method. Considering that Florida and California is at least 20% of their book, do we need to elaborate further? A mark on Citigroup's QSPE of 85% or less and J.P. Morgan's of 77% or less and it's Tier None for them also. Pay no attention to the FDIC marks behind the curtain folks! Securitizations are not like snowflakes because each are unique but rather because they all melt fast when the heat of observation is applied.
And the other two 'news items', GDP ramping and the consumer spending, implying 'champagne wishes and caviar dreams'? In ancient times the headline was GDI not GDP. Why? Well because GDI counts the total income in the economy while GDP measures the output of the economy as the sum of expenditures — consumption, plus investment plus government spending plus net exports.
WSJ blog
By Justin Lahart
3/19/2010
In theory, the two measures should equal one another, in practice they don’t quite, and Mr. Nalewaik, a Fed Economist presenting a paper Friday at the Brookings Panel on Economic Activity, argues that GDI is the better of the two.
He finds that when the Commerce Department’s Bureau of Economic Analysis revises its national income and product accounts, GDP figures move more closely inline with GDI. GDI also appears to have a stronger correlation with other economic indicators, and its recent movement around turning points suggests it more closely tracks the economy.
He notes that GDI fell far more sharply in the teeth of the recession, dropping at a 7.3% annual rate in the fourth quarter of 2008, and 7.7% in the first quarter of 2009. GDP, in comparison, fell by 5.4% and 6.4%. Moreover, while GDP showed the economy began to grow in last year’s third quarter, GDI showed it continued to contract.
(Zip-a-dee-boohah Mr. Grant. -AM)
(Fourth-quarter GDI figures aren’t yet available.)
“[T]he latest downturn was likely substantially worse than the current GDP… estimates show,” he writes. “Output likely decelerated sooner, fell at a faster pace at the height of the downturn, and recovered less quickly than is reflected in GDP… and in conventional wisdom.”
'Mr. Hand's strong dollar policy is the chimera of currency debasement masquerading as America's wealth exporting machine that is regularly promulgated by our leaders as an exceptional example of America's resiliency.' (AM Rule #5)
But wait what about the savings rate decreasing, it's all good right?
Only one glitch, incomes did not increase.
From the venerable Peter Atwater at Minyanville:
'As I type, mortgage delinquencies exceed 14% while credit card delinquencies are closer to 6%. And owner-occupied mortgage delinquencies now exceed non-owner-occupied delinquencies. (And, for what its worth, home equity and second mortgage delinquency levels are far below first mortgages.)
Those in the financial-services industry argue that consumers are acting irrationally. Of late, I'm not so sure. I think consumers may, in fact, be acting rationally irrational, making what appear to be the correct decisions for the short term while completely ignoring their long-term consequences.
While likely to make me unpopular within the Beltway, I think a lot of the behavioral change is a function of two new phenomena: the constant vilifying of the banks as well as Washington's seemingly endless desire to facilitate mortgage modifications to underwater mortgage borrowers.
While not suggesting either is right or wrong, both actions invite delinquency if not outright strategic default. And the higher the overall rate of delinquency, the higher the likelihood of some kind of "negotiated" settlement. To mix my metaphors, one quacking goose may be shot, but a cacophony of squeaky wheels will ultimately be greased.
At least, looking at the data, that's what underwater American homeowners are clearly betting.
In the meantime though, the payments that would otherwise be put in the mail to Countrywide and other mortgage lenders, are being used to pay down credit card debt at unprecedented levels and being spent on living expenses including, per a recent Wall Street Journal article, season tickets to Disneyland and Carnival cruises. Call me a skeptic but I don't think it's any coincidence that we've seen an improvement in consumer spending coincident with a rise in mortgage delinquencies.
(And lets insert here, to be clear, that with double-digit unemployment, a significant portion of the reprioritization of payments are out of sheer necessity.)
Consumers are acting rationally irrational.'
Or as previously written on this blog:
Extend and pretend is the proposed means to mend. Pay no attention to the marks behind the curtain. What ever the banks want to show they show.
The Nancy Capitalists proclaim its' all good, and we all should support that which brings recovery home.
But a storm is being created.
What they fail to realize is that they are corrupting, not supporting the American Dream; through their desire to be prophets they have ceased to be makers of their own fate.
The American Dream is becoming the American Scheme as moral hazard is writ large.
With Mr. & Mrs. America feeling no compunction to walk away from their home if their neighbor does it, with the neverending Federales policy of exalting drunks and punishing the sober, with the phrase 'the whole thing's a Ponzi' being uttered by even the most ardent of conservatives at family functions - life is imitating the arts of the elites.'
OTC derivatives, Build America to expand muni debt capacity(a good idea??), pension shortfalls, are yet more examples of the elephants in the womb.
When wise folks say that you should be your own central bank, are they doing a Barkley? Being your own corporatocracy may be rationally irrational but life liberty and synarchy for all is one hell of a way to go through life son.
On that path most assuredly the devil will be paid his due.
It won't matter until it does.
And when it does...
When we get off Sugar Mountain...
Oh mama!
"Ain't it funny how you feel when you're findin' out it's real"
http://www.youtube.com/watch?v=FsACIBI5NPk
'I may be going to hell in a bucket, babe, But at least I'm enjoying the ride.'
-Grateful Dead
I'll add: "...when life looks like easy street, there is danger at your door"
Bloomie has a story that a Greek bond sale today had a bid to cover of 0.5...YIKES!
it's the Easter Bunny's fault, didn't you hear? LOL
My mom once blamed the Easter Bunny for the lack of candy Easter morning. If it's good enough for mom, it's good enough for the Greeks.
Short term rates may rise but the curve only flattens if the long end doesn't rise too. As long as more time until maturity = greater likelihood of inflation or some form of default, long rates will be going up too.
Proof that Bernanke is a f*cking moron.
+1
Ben = F#$#@ SAVERS = FREE MONEY FOR BANKS = 21st Century BUBBLE 2.0
The important thing to remember is that there is no curve.
Where can I go to see when treasuries sold in the past are maturing? I watch treasury direct daily for today's sales and can plot maturity date from there, but where would I go to see all the 30 year, 10 year, 7 year, 5 year, etc that were sold in the past? Or do I just need to do it all by hand?
Yeah, sure. The curve flattens from the rising short end until it bounces against the ceiling the same way it does when it tries to steepen from the long end. Sound and fury signifying nothing. No offense. [/Macbeth]
Weaker auctions to come...
Good linux hosting option package offered by ucvhost which not only provides the best in terms of hosting packages but also believes in truly being there for the customer, 24x7. windows vps Moreover , they offer unlimited bandwidth as well as nearly 1GB storage along with database maintenance, email facility along with storage, availability of sub domain and many other important features for a very low price. ucvhost