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A Detailed View At The Maturity And Duration Distribution Of US Treasurys, And How The Fed Has Found Itself In Another Catch 22
As part of today's refunding announcement, the US Treasury provided a link to much needed monthly detail of the curve maturity profile. Below we present the two key charts.
The first, present the average monthly maturity for the entire curve. As can be seen by the blue line, even as the average maturity plunged to an all time low below 50 months in late 2008, this has since been increasing and the current 59 month average maturity is not only the highest it has been in over 6 years, but is higher than the 10 year average of 58 months. A preliminary conclusion is that issuance is finally normalizing, and that investors are no longer focused on seeking the safety and liquidity of ultra short-term rates. Yes and no. A far greater driver is the yield on the 5 Year Bond (red line presented on an inverted axis), which as can be seen has plunged to an all time low of just over 1%. As such, investors have been pushed from chasing liquidity to chasing yield, which in itself explains the eagerness of purchasers to move to the right of the curve. This in itself is a major risk: while the Fed's actions can control the near-end of the curve, when it comes to the curve belly, the Fed is far less effective using traditional policy, and is forced to outright buy the bonds. Which explains why yields are where they are. The issue is that when (if) QE ever ends, the rush away from even the 5 year spot on the curve will result in a major shift in maturity lower, and the Treasury will have no choice but to refinance rolling debt with ultra-short term debt, until the entire curve is grossly skewed toward Bill holdings in an attempt to avoid an interest payment explosion.
And here is the other, probably even more important, chart which breaks down the entire marketable debt curve, demonstrating how much debt matures in any given amount of time. Not surprisingly, on a relative basis, just 10% of the entire $8.5 trillion in debt as of September 30, only 10% matured in over 10 years. What is notable is the drop in debt maturing in under 1 year, which is now down to 30%, the lowest in a decade.
Again, as above, the only reason for this is the need to chase yield ever further to the right. The second there is any steepening in the curve, aka an improvement in the economy, there will be a rush to flee all positions, forcing Treasury refis to focus ever more to the left of the curve until it hits Bill (<1 Year) land. Which once again bring us to our original hypothesis, that it is not a failed auction as an actual rise in yields that is the colored swan.
In fact, in an ironic twist, the Fed has once again found itself in a catch 22: the second the curve stops flattening, especially in the 3M-5/7Y sector, whether due to the end of QE2-XXX, or due to actual, legitimate economic improvement (and you would see it here first, nowhere else), the interest paid on US debt will surge, and the Fed will have no choice but to roll all expirations into bills, creating a Frankenstein of a monster in which the entire US economy will live bill auction to bill auction, until even the rate on Bills become unsustainable.
Source: US Treasury
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EXACTLY!!!!!
This is ultimately why we are doomed. There is no possible way out for the Fed/Congress. Here at he end, the failed Keynesian bubble goes exponential and parabolic. There is no stopping it. Period.
+2 !!!
Tons of people saw this MILES AND MILES AWAY. No way out now. My golly, the bobbleheads will be surprised now? Or soon, when rates flip in a *day* (or millisecond, given HFT?) You've got to be some kind of moron not to see this coming.
They are merely holding down the "Ctrl" and "Alt", with their finger paused over the "Del" key.
(Tap tap. Is this thing on?)
ZH missed the biggest story of the day: the price of gold is dropping like a stone - an almost 2% drop so far. Strangely there's not a single ZH article about it - while every new +0.01% high of gold got its own ZH headline in the past. Weird.
In wake of today's Fed announcement of the destructive, hyperinflation-generating, dollar-destroying QE2 package, according to monetarist/austrian economics the price of gold ought to explode upwards, not downwards, right?
Or is true that gold is just another type of fiat instrument and that monetarism/austrian economics is just one of the hundreds of flawed macro-economic theories that exist today?
Here. Sorry for the accumulated re-post but this is the best explanataion of today's gold activity as you're going to get.
by Turd Fergusonon Wed, 11/03/2010 - 10:23
#695914
From earlier:by Turd Ferguson
on Wed, 11/03/2010 - 08:44
#695522
I wanted to chime in before the morning got to busy. Didn't know where to post so I thought I'd use this sticky.
Gold, obviously like everything else will be range-bound today ahead of the "big announcement". As mentioned last week, 1365 will be defended at all costs by the EE as they desperately try to buy time. Blythe feels that IF they can hold 1365, they'll have painted the daily chart with a head-and-shoulders top and that should be enough to keep gold in a box for quite a while. You can see it already this morning. Gold again tapped 1365 only to be immediately beaten back by an avalanche of paper gold sell orders.
So, the question is, what happens this afternoon? I fully expect a "sell the news" type of event, at least in the very short term. I would imagine that the quick reaction will be a sharp $ rally and selloff in gold, if anything because Blythe will be waiting with an abundance of sells to overwhelm the bid right around 2:20. Some other nervous machines will kick in and gold may drop as low as 1325-30 pretty fucking fast. Blythe will then, cautiously, sit back, cross her fingers and pray.
At that point, I expect the buyer(s) of size to appear, as if on cue. Gold turns and then rallies sharply back to 1350 or so. From there, let the QE news go global and sink in for a while. Gold rallies more tomorrow and finishes up for the week. A close above 1365 on Friday will be enough to cause major headaches for Blythe and her minions.
If I'm right and all of this plays out somewhat accurately, gold will trade through 1400 sometime next week and then on to 1500 by 12/10/10.
Updated then at 10:30 or so:
Obviously, Blythe decided to act early. The question is, what does this mean?
To me, the only reason for smashing gold now is this: The EE either knows or suspects that the QE2 announcement is going to be larger than anticipated and, therefore, PMs are going to rally sharply. So, crush the PMs now in order to cover shorts at lower prices before the blastoff.
Again, if anyone doubt the existence of the EE and their influence on today's action, simply look at a one-minute chart of todays' action. Violent one-minute downdrafts galore. Only the EE has the power to overwhelm the bid like that. They are clearly trying and succeeding in dropping price before the announcement. Again, why before? They are clearly afraid of getting their collective nuts and ovaries in a vise this afternoon.
I am very confident of a big price move UP later today.
Glad to see the repost! Today should be a wild day!
Hey Turd when are you going to start submitting articles here ? For a dumb redneck ,you seem to know your shit .
Thanks. We'll see...
Well, its 2:40 and it's certainly not "over" yet but this is looking pretty good so far:
"So, the question is, what happens this afternoon? I fully expect a "sell the news" type of event, at least in the very short term. I would imagine that the quick reaction will be a sharp $ rally and selloff in gold, if anything because Blythe will be waiting with an abundance of sells to overwhelm the bid right around 2:20. Some other nervous machines will kick in and gold may drop as low as 1325-30 pretty fucking fast. Blythe will then, cautiously, sit back, cross her fingers and pray.
At that point, I expect the buyer(s) of size to appear, as if on cue. Gold turns and then rallies sharply back to 1350 or so. From there, let the QE news go global and sink in for a while. Gold rallies more tomorrow and finishes up for the week. A close above 1365 on Friday will be enough to cause major headaches for Blythe and her minions."
Price of gold is very telling here, IMHO. There was too much hype around this announcement, and it seems unlikely that it will do anything except disappoint. I'll go out on a limb and say that I just bought positions of VXX and QID, and am mostly in cash. I hope in an hour i'm not shamed!
Don't worry your heads about it, weary goldsters.
You're just tired from being up all night watching Fox News and crying tears of joy for Rand Paul.
Gold has plenty of time to go up. After all, they haven't even finished the HFT data center at the CME! Team Atari has lots of golden message volume planned for your viewing pleasure.
Bernanke will announce a nice, smooth QE2, bond yields will go gently negative and gold prices will follow. The golden liferaft for your savings will stay afloat at least until $1500 and I think $1700 is in the bag.
A really big QE2?
The sky's the limit!
After all, it's not like we're gonna see any massive defaults in the near future......or......
Relax CT, it is called a correction. Happens all the time. Look what happened in 2008. Good grief. Remember, gold and silver are more than commodities. They are real money. The bankster gangsters (as John Stadtmiller ) calls them know this. I mean come on CT. Why is it you think that the same people who run the FED and the international banking cartel , also set the price of gold and silver two times a day from the city of London? That sir, is called real power and besides this, they also own a lot of gold and silver and also own the means of production and mining operations for these metals etc. So please sir, go back to the drawing board on this one.
PS. I did not even go into the constant daily manipulation that goes on by the big short sellers whoever they are.
Hey MCT - it's called "Buy on the rumor, sell on the news." You should learn about that concept sometime, lest you get runover by a locomotive.
Oh, and as I type gold is back up again, now only down about 1% from yesterday, and above where it was just a couple of days ago. Newsworthy? Nope.
Dude... its roughly $30 off of its all time high.. get over it already.
Dude... its roughly $30 off of its all time high.. get over it already.
Oh my gawd, we're all gonna die!!!
It has dropped a whopping $26...but actually still waaay above $1300... My average cost price is $974 per oz., I think I can handle that.
(Maybe you should read Jim Sinclair, he forecast $100 daily moves in gold soon to come - in both directions that is!)
I don't see a way out either. Well, perhaps some aliens could land and share their technology on how to power automobiles with salt water.
Screw that, I'm getting a UFO.
And off this rock.
Is this (in the Fed's mind) the only way out of the liquidity trap?
queue mako, in 3,2,1...
CR is on ZH? Nice.
TD, a long time back didn't ZH post a 3D animated bar graph for the debt due that went forward through time?
Is this it?
http://www.zerohedge.com/article/visualizing-past-treasury-yield-curve-a...
Great post, TD.
Duration will be the variable that fucks the Fed.
Keep it going, even though I am sure you sometimes tire of the repetition. Never give up; never surrender.
yes, THE INTEREST RATE EXPLOSION! That is a point that has been ignored forever. Much like the dirt bags that bit off more than they can hold much less chew of the funky stuff, all of a sudden, unbeknownst to them they will tell you, mortgage payments went up like crazy! Oh...that ARM shit...oh...better go read that.The Govt, when rates start to rise quickly, are in for a major interest payment shock.
But the govt has a big interest payment dilema...bleed out the nose or pay out of it.....let's see where the blood comes from shall we?
they will just monetize it all...this extends the game the longest
Yup
i'm a useless idiot so can someone explain what the trade is here?
thanks in advance
Trade your money for a farm and stock it with food and guns.
Trade your BANK'S money for a farm and stock it with food and guns PURCHASED WITH YOUR BANK'S MONEY. Pay it back later with devalued USD.
A surge in yield won't matter because by then the Fed will be the buyer of 100% of all government bonds and, as we all know, all interest paid by the Treasury to the Fed gets returned directly to the Treasury.
Meanwhile, the entire world will have lost faith in the US dollar, ditched it as the reserve currency and every Eurodollar returning home will have pushed a loaf of bread to $100.
Nothing to see here.
Exactly. When the entire curve goes flat at 0% the gubmint can borrow infinite clownbux at zero expense.
The yield is irrelevant. It doesn't matter if it's 0% or 10%, Treasury can borrow infinite clownbucks at zero expense <em>provided the Fed is buying</em>. It has always been this way.
The Fed will never stop buying. QE is now perpetual and the author of this article is barking up the wrong tree.
Same story as it has always been, ie the Fed is in the process of killing itself and taking everything with it.
so if the economy gets better , then this will spell the end of the financial system or if things continue the way they are, that too will spell the end of the financial system? hmm, what to do , what to do?
gold bitchez?
The thesis of this piece is just wrong. The problem is that both the author and Bernanke actually believe the theo-classical economics nonsense that the curve determines whether the Treasury can sell paper. It doesn't - certainly not at the zero bound.
The market theo-nomical beliefs also lead to Bernanke's obession with long rates. At the zero bound, the government should be taking advantage of long rates buy radically shifting debt to longer maturities, not engaging in some farcical push-me-pull-you stuff.
This is a classic example of reflexivity.
That's what I don't get. IF one is going to try to unwind this over a long time it seems the Fed should go long. If one has a ticking time bomb a longer timer is better. Even though the shorter durations have a better/lower rate it is the one most likely to blow up in your face when it gets refinanced...given that debt will roll over indefinitely.
Exactly.
In this situation the ONLY thing that can get a Fed Chairman/Treasury in trouble is being too academic.
Every effort should be focused on reducing subsequent refinancing exposure and it CAN be done. Monetization should focus on just that: MONETIZATION OF DEBT. Rates? Fuck rates. Rates are pinned. Besides, without a government guarantee (thus, an implicit CDS to sovereign) nobody's lending at anything but deflationary terms anyway.
The only thing that will hurt us is all this market theo-nomics bullshit.
Curves? Fuck curves. Curves are bullshit in this environment.
This is about system risk and politics.
No, and no.
Only part of the issue is the frequent roll (past bonds expiring triggering new bond issuance beyond the current deficit). The other part of the issue is the interest coupon itself.
For example, if the Treasury rolled *everything* to 30-year rates (assuming that kind of auction could be performed), then *everything* would pay 30-year rates. That effectively moves the entire debt to 4%-5% (at present rates), rather than its current short-term average rate at 1%-2%.
Jacking Treasury debts to the higher rate would consume the entire Federal tax base merely for coupon payments. That means literally, there is no more money for Social Security checks.
In effect, we've borrowed "infinite money" at zero percent, and we can't handle a change to even 1%. (That's a metaphor for today, but it will be literally true within months.)
That's why the Fed is screwed. Can't roll long (the rates are higher than now), and can't roll low (they are as low as they will go, with an exponentially growing deficit).
It's all about the cashflow: There is none.
Quote of the day.
---------- It's all about the cashflow: There is none. ----------
---------- It's all about the cashflow: There is none. ----------
---------- It's all about the cashflow: There is none. ----------
---------- It's all about the cashflow: There is none. ----------
You can't print prosperity.
Mikla, you're just wrong on the arithmetic there.
If Treasury rolls into 30-year, they're in clover (after some monetization).
Sure, they'll finance the coupon, but so what? People will buy that long-dated paper and that is just a fact.
There is no arithmetic in your response.
Rather, you're asserting/assuming:
I doubt either of those -- and only one needs to fail to trigger "sudden stop".
I think we disagree on the point that "monetization is free" (or a low, or even quantified cost).
Yeah, there's an "exponential penalty". I get that. That's why they will monetize.
I can show you $4-$6 trillion of relatively harmless monetization.
If you think monetization will be costly, you clearly haven't fully considered the implications of default.
We agree that monetization failure means "it ends now". We agree that is unthinkable. However, IMHO, it's time people think about it.
The reason monetization *won't* continue to work is that it merely shifts the "losses" to different parties. The losses are still there, and growing (they won't be retired, they will be increasingly levered). Some of the "new losers" won't like that. As a result, monetization will ultimately fail, because quite a few people won't like those losses being shifted to them on a permanent and increasing basis.
You can look at the problem from a demographic viewpoint and because older people are vasly over-represented among those who A) Vote and B) Are Rich it's an oversimplification, but a valid one:
There are too many retirees collecting and entitled to benefits who are way too rich and expecting coupon and interest payments from people who are themselves retiring and entitled to benefits who are too poor. Both groups are expecting both coupon and principal payments AND benefits from workers who are poorer still.
The rich, old people expecting coupon and interest payments are not going to get them. It's just that simple. They are either going to get less valuable cash from monetization and inflation or they are going to get whacked with massive defaults.
Since they are the richest, most politically powerful, most long-lived group of older people in the history of the world, they are not accepting this reality gracefully or quickly.
'People will always buy it'...thats your ultimate conclusion?
No, Sheep, not "always" - just now, during this deflationary period.
That's why the imperative to act.
Ahhh! Thanks. I see your point. I saw a chart from an interest group showing what happens to the national budget as interest rates rise up to 5 or even 8%. At 8%, the interest alone was larger than the entire U.S. budget. At 5% you barely have enough to keep the lights on. Can't remember the details but it showed the trap the Fed is in as you describe it.
Seems like the other part of the trap the Fed cannot control is the projected endless borrowing the U.S. Congress plans. The Fed has become the enabler for the addict.
That's why the answer will be to monetize now - and I don't mean any bullshit $500 billion, either.
After that, they MUST borrow long during this deflationary period, because it is true that rates will eventually go up very sharply - like to 10-12%. That's a big deal if you own bonds, but why do I care? I don't own bonds.
rates will not blow to 10% so long as the dollar is reserve.
Rates can only go that high when/if the dollar collapses.
The economicalness of the US is not even close to 10%. 0-.25% is really all that our economic climate can support. There's no demand for credit even at 0% these days. Z1 is falling as a result
Agreed. Provided that Bernanke sees a need for QE then yields are absolutely irrelevant as to whether or not the Treasury can sell paper. People who are worrying about a yield explosion killing the USA through interest service are forgetting that the Fed returns almost all (>95%) of interest income on govt bonds to the Treasury. Provided the Fed is the dominant buyer of Treasury paper, the interest service is therefore effectively $0. In effect, Treasury can (indirectly) print all the debt free money it wants with the inflationary effects being sterilized when paper comes due (recovered through taxation). In other words, the debt isn't scary at all if the Fed is on the other end of it.
I know what you're saying, it seems mad that Treasury isn't floating more paper at the long end to take advantage of these insanely low yields. (Who the hell thinks GDP growth + inflation is going to stay dead for 30 years?) *but* I don't think Treasury actually has a choice here. In my opinion it's the central banks that are dictating exactly what paper the Treasury floats (as the dominant buyers) and their preference is, logically, for shorter dated paper. Although I can't prove it, I'm inclined to believe that most indirect action in auctions is actually central bank back-scratching: "I'll buy yours if you buy mine" (conducted through Cayman shells), a way for CBs to make auctions look more healthy than they really are in order to con independent interests to participate. As the independents run for the hills, all that's left are the CBs and they don't want long paper so much.
First-World CBs know they are eventually going to be sending each other a lot of cash from monetization and naturally they're pissed off about it. They see it as stealth currency debasement and they're right.
They should just grow up. If you look at it from a long-range historical perspective, sovereigns monetize. It's their right and it's what they do. Either they do it the hard way - through default - or they do it the easier ways through monetization and other currency and debt "rationalization" procedures.
Bondholders get screwed. So what? What do I care? Welcome to reality where your "risk-free rate" isn't.
This point is absolutely bang on.Quite without the charts even, it is plain that when interest rates rise, which they will, actual prices of government bonds UK, USA etc, will crash. As in halve if interest rates go from 0.5% to 1%, or even by two thirds when rates go to 1.5%. 2.5% anyone?
Question, someone will be holding the bag of overpriced government debt at this terrible point. Make sure it is not you.
@More Critical T...
#the price of gold is dropping like a stone - and almost 2% drop #so far.
you're fucking genius... really.. gee.. you expected what:
gold would gain 2% eahc & every day..??
hey Einstein, if you have trading terminal.. fund out how
many days gold dropped 2% since 2000... if you know what i mean
alx
ps
no offence pal , but look at your pic
you'd better train brains instead of muscules..
The trade off for big musles is SDS (small dick syndrome)
Huh? How come I didn't get me the big muscles? Ripped off yet again.
Its easy. Just go get some roids and stick the needle in your thigh and then go pump the iron. In a few weeks you too will have 24 inch pythons. I remember back in the 80's I use to see youngsters, coming into the locker room, with their brown bags and their needles and there bottle of steroids which they would then administer on themselves. This was at a time when roids were quasi legal. This was before the big take down at the WWF about all of this. Some people will do anything to get big I guess, no matter what the long term health consequences are.
uh...it takes many years to get that big. And you don't inject in your thigh unless you are a serious user who has several injections to do. HGH and IGF are the big growth drugs now.
As far as LT health consequences...just like with reefer madness or E pills, show me the bodies.
Part of it could be an expectation of improving economic conditions with a Republican victory with a little profit taking. There are lots of people in metals with lots of different reasons and time horizons. The traders buy, sell, skim small gains first and fastest but I don't think they are the center of gravity in this market. A lot of people are taking deliveries. That's a whole different customer.
What happens when the Fed figuratively commits suicide by buying up all the Treasuries with dollars, aka FRNs, and interest rates inevitably revert to their historical mean?
What then (theoretically speaking, of course)?
There are legal pressures being applied to Ben Bernanke and the US Federal Reserve Board, in connection with the World Global Settlement Funds, which have not yet become fully public in the US, even though the papers have been in the hands of the mainstream media for several weeks.
One example is contained within a letter to Bernanke, dated the 22nd September 2010, from Pasadena attorney, Al Clifton Hodges.
The Hodges letter reads:
“I represent Mr. Lindell H. Bonney, Sr. with respect to collection of certain funds currently being held by the Federal Reserve System; Mr. Bonney has both a personal ownership interest and a fiduciary interest in such funds. I also represent certain other payees of the World Global Settlement funds; each of these payees have exhausted their ability to continue waiting for distribution of the funds to which they are entitled.”
“We have been able to ascertain that these funds have been utilized, apparently with the approval and consent of the FED, for short term lending/hypothecation cycles which have allowed recovery of substantially more than 3% per day of the principal in addition to the FED transaction fee of 10%; we have now received confirmation that the FED has in fact received payment. These actions are obviously in violation of several Treaty agreements, as well as a plethora of Federal Laws and banking regulations, and expose each participant to both criminal and civil RICO actions.”
“The purpose of this correspondence is to put you and each member of the Board of Governors on notice of these illegal actions in connection with the continued refusal of the FED to disburse monies due to be paid to Mr. Bonney in his personal and fiduciary capacity. Although we have previously been advised that the funds were available for disbursement, “something” has always been amiss when the scheduled time has arrived. On each such occasion, Mr. Bonney was ultimately advised that the money had, for unexplained reasons, become unavailable.”
“Please be advised that we intend to hold you and each member of the Board of Governors jointly and severally responsible for a minimum of 10% per day recovery on the entire balance of the funds currently held for distribution to Mr. Bonney in his personal and fiduciary capacity. In the event that you and/or any of the Board of Governor members wish to discuss possible resolution of this issue please contact the undersigned directly; in the event that I fail to hear from anyone I will pursue all available remedies, including immediate disclosure of these defalcations to the media.”
Coordinates and co-correspondents here: http://bit.ly/9j0D54
Think they will just beat everyone to the punch
and find a way to declare force majeure before this happens?
A superior force caused non-performance by...THE superior force?
That would be a fantastic press release.
the front end of the curve is the most easily manipulated by the Fed, since they can set the rate in this part. so there really is no reason we should have a "Frankenstein of a monster" where the "rate on Bills" becomes "unsustainable."
Its all in endgame mode, everyone knows its over.
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