Gleacher On The 10 Year's 2% Handle, QE6, And How The US Treasury Wins Again And Everyone Else Loses

Tyler Durden's picture

From Gleacher's co-head of rates, Russ Certo

I don't know from what level but I have a strong sense that the 10 year note will have a 2% handle in the coming days/week.  It may be extremely difficult to get long bumping up at 200 day moving avgs, in the midst of supply (5yr note auction just came 1.7 bps through 1pm levels.) and we have $35 billion 5yr equivelants in the form of a 7 year auction tomorrow.  We also have ANOTHER refunding announcement right after the long weekend for more 3yrs, 10yrs, and 30s to be auctioned shortly we get back from the holiday Hampton hedge.  

But supply meets DEMAND.  The bid/cover oddly enough for the 5yr note was 3.2x and while bumping up at the high end of the range.  The last time this statistic bid/ cover was this high was in August of 1994 and the issue sizes were a mere $11 billion.  At the time that would imply $35 billion in bids for the paper.  When you extrapolate for today's $35 billion 5yr, the 3.2x cover implies bids for over $112 billion.  

Who needed to buy $112 billion 5 years near  new range break out low yield prints?  And who would pay 1.7 bps through in order to do so?   I think it is obvious that there is "official" demand in the form of central banks and official institutions, pensions, excess reserve banking entities recirculating monies and the like.  I feel goosed.  Seems like we are on QE6, they just didn't tell you that it started.  And we have seen this before. 

Coupled with long holiday weekends and  month end to follow (extensions below), I think investors (and the street) are on the defensive.  These nominal rates are mis-priced but sometimes logic can be your downfall.  To me, 3% 10 year yield becomes a self fulfilling prophesy when dealer/traders successfully defend the high end of the range 5 times or so {gt10 govt gip20<go>}.  So, the optics are painful but this market is on a search and destroy mission and policy makers appear to want lower rates.    

Speaking of such, last time mortgage rates were here, there was 40% greater refinancing activity.  Pushing on string laws of diminishing marginal returns (low rates, QE2s, whatever) seem like an effort in futility if you look at refinancings. 

Fundamentals?  Economic activity is mixed at best too.  Maybe this "crowding out" of rates by central banks and other official institutions is really about international banking. 

Maybe, the severity of the litany of unintended consequences of this low rate coordinated policy ( coordinated policy used to mean coordinated rate cuts or FX intervention but now coordinated means under the table excess reserve "asset" purchases) which is penalizing savers, reducing income based consumption, creating more leverage and robbing economic fundamentals from the future and the like, are more beneficial than the alternative of stakeholders perceptions how bad banking balance sheets are.  Maybe, if you don't have sound financial institutions (or the perceptions of such) or sovereignties, both of which need a function of time, lower rates, higher net interest margin, to work their way out of insolvency, then all this is worth it.  Maybe, solvency conditions of banks explain this seemingly confusing relentless easings of polcy.  No sound banking system, nothing sound. 

Like how bad level 3 assets, total real estate exposures, second liens, phantom accounting and tier 1 ratios, regulator attack on bank revenue models.  Maybe engineering this rate structure is worth it in the eyes of policy makers despite all of the adverse alternative consequencesMaybe, the policy community has a different philosophy.  They always do and recall when Geithner at previous NY Fed under Greenspan regime and Congress incessant push for housing formation and other exposures.  And the previous bouts with over leverage and government and private sector exposuresMaybe, $100 billion plus bidders powers to be find the low rate structure is worth the risk.  Chalk it up to another win for the US Treasury and a loss for the dealer partner primary counterparts.  Can't wait for the 7yr and sub 3% 10yr. 

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nope-1004's picture

100% Ponzinomics.  It's the "new normal".  Banks are white-collar criminals, plain and simple.

Screw the people, suck the life out of the working population, rape cleaning ladies, and live opulently ever after.

MassDecep's picture

save me ...

Feel the rhythm with your hands

LawsofPhysics's picture

What, no chart porn to accompany? 

JW n FL's picture

I need an esquire to File Suit in Federal Court Against the U.S. Government.. more over the President of the United States of America. Pro Bono in the name of Fight Club!


The Law Suit is for breach of the Constitution for bringing home the U.S. Army and now Training the U.S. Army to operate Against "We the People".


Who wants to get some T.V. face time for themselves and for Tyler here.. we want warm bodies to educate we have to up our visible profile.


I am looking for feedback and ideas to make as big a splash as possible! so if you have something that will help, speak up! even if you think its small! speak up! every little thing matters and helps! SO PLEASE!!! Speak Up!


FreeNewEnergy's picture

Yeah, great idea. Me, I'm just trying to figure out just what is the perfect amount of mayo on a salami, ham and cheese on white.

Sorry, can't help you.

Urban Redneck's picture

You can't file a lawsuit against someone until they have broken a law.  The military "training" I don't believe meets the threshold. 

However, one might be able to obtain an injunction baring a unit that has received such "training" from deploying on US soil.  Lower burden of proof, less time to execute, simpler argument to the judge.

This is coming from someone who deals primarily with international tax and trade issues - so I am definitely not an expert.

hedgeless_horseman's picture

You can't file a lawsuit against someone until they have broken a law.

Flag as patently false (1)

Urban Redneck's picture

Correct.  You can file a lawsuit anytime.  But what is JW's goal?  I don't think it is merely PR points or finger jabbing the beast. 

If someone files a nuisance suit against me, they incur my wrath, and I am pitifully capitalized compared to the US government.

Regardless, one needs a "victory" in round 1 to put the opposition on the defensive for round 2.  Anything less is merely an extravagant declaration of principle. 

Play to win, or don't play at all.  What would you recomend JW do?

oogs66's picture

Now Bernanke can claim QE2 helped mortgage rates AND the Russell 2000.  Man is a genius!

RobotTrader's picture

The greatest of all time.

The Bernanke Fed model will be studied for decades at the top business schools.

SheepDog-One's picture

WOW Robo is it possible for you take any more Bernank cock down your throat? You dream of being a Pigman, but forget it youll never be one.

Deep's picture

yup the greatest

under his watch we had a total collapse, the dollar is getting crushed, and gold is skyrocketing, and the market is still sown 20% from highs

but even better, measured in gold, the dow is down 80% since 2000

this is an awsome model, why didn't we think of this sooner?

Trillax's picture

... perhaps as what not to do.

Sherman McCoy's picture

Listen, we have to fix the banks. If that means robbing from grannie's retirement account income, then so be it. She should have bought LinkedIn. We will have 0% financing and an historically steep curve for as long as it takes for the snake charmer to generate enough interest income to offset the losses in his "mark to make believe" portfolio. It worked for Greenspan in '91, and it will work now. What we really need are 2% mortgages so those that need a lower mortgage payment get it, and all the buy to let folks can get carry on their new rentals. Now, that would be nice!

Corn1945's picture

If it "worked", why are we right back in this spot again?

SDRII's picture

Peak debt + math = fail. BTW didn't Glen Hubbard already present a 5% across the board mortgage per a WSj editorial to "fix" the crisis. or maybe he was just shilling for a repeat of the refi revenues for the banks

glenlloyd's picture

You are obviously extremely confused. Where is it written that private banks have to be saved from their idiotic mistakes, and in some cases self-engineered mistakes?

You can't see the forest for the trees.

Engaging in moral hazard has never been an endorsed policy.

hedgeless_horseman's picture

Seems like we are on QE6, they just didn't tell you that it started.

Ben's tell: Inflation?  What inflation?

Sophist Economicus's picture

The FED and other CBs are slowly wiping out the bond vigilantes.  I wouldn't short bonds, better to buy gold.    This bond coercion will not end well...

the rookie cynic's picture

Agreed. Backed by the printing press, the Fed can buy up all the bonds and thus keep their nominal prices up and interest rates low until...well, until the dollar is confetti if that's what they want. They can buy a lot more and hold it a lot longer than anyone can short, unless you've got your own printing press, of course. :)

Gold is a better move.

slaughterer's picture

Now is definitely not the time to short bonds.  But July, another story.

RobotTrader's picture


Who would have ever thought that the "unintended consequences" of increasing the national debt from $1 trillion to $14 trillion would have resulted in an outright collapse in 10-yr. Treasury yields from 16% to 3%?

Corn1945's picture

Greece, Ireland, and Portugal used to pay 3% also. We all know how that worked out.

This shit isn't even common sense. It's at a lower level than common sense. Someone can understand this if they can successfully dress themselves in the morning.

SheepDog-One's picture

Funny part is, it will blow up suddenly, not some gradual easing off. A lot of financial people on ZH pay no attention to world war 3 in the wings, which could ignite any day now.

nope-1004's picture

Who would have ever thought that the "unintended consequences"

Those "unintended consequences" were 100% intended, through 100% market manipulation.

The Fed is a 100% fraud

The Treasury is a 100% fraud

The market is a 100% fallacy

PM's are 100% manipulated down

Inflation is 100% covered up to keep the bankster agenda going.

Who woulda thought, eh?


johny2's picture

Who woulda thought we still took the interest in it, even though we know that it is manipulated? It is like watching American Wrestling. I mean it is enough to buy the PM, and turn off the internet and tv, and enjoy the good things in life, rather than follow this ponzi scheme. 

The Axe's picture

As you know Robot   money needs velocity..and the only velocity I see is at the gas pump ..Not  any lending..

hedgeless_horseman's picture

Who would have ever thought that the "unintended consequences" of increasing the national debt from $1 trillion to $14 trillion would have resulted in an outright collapse in 10-yr. Treasury yields from 16% to 3%?

To me, the truly amazing thing that I would have never have imagined in my wildest dreams is that they did it in the open...pOmo.

Who would have ever thought, indeed?

topcallingtroll's picture

This shows that complex systems such as an economy with a debt based monetary system will have emergent unexpected properties.

This is why i rarely speculate on macro themes but use sentiment and divergence.

You cannot outhink a complex system in the long run and any short term wins may be just councidence.

Biosci's picture

This is perhaps the most insightful post I've ever read on ZH.  Pity it's so much fun to pretend otherwise.

topcallingtroll's picture

This is also why i dont think anyone can be certain that the system will or will not collapse in our lifetime.

Contrary divergence based strategies have been empirically validated to have a small alpha. I wish i had the reference for that but cant remember. It was either modern portfolio theory, random walk, or nassim taleb, or against the gods. All four excellent reading anyway.

mayhem_korner's picture

i dont think anyone can be certain that the system will or will not collapse in our lifetime.

...but you can be certain the system will collapse.

Biosci's picture

To be honest, I was talking about your summary of the market, not your trading strategy.  But to each his own.

Reading list noted -- for that day when my inbox isn't full of science journals.

bogey4's picture

I think it's bs - the guy doesn't really say anything of value in his commentary. 

mayhem_korner's picture

The system is only as complex as you want it to be.  The core fundamental, obscured as it is, remains:  (Physical) Production - Consumption = Real Wealth.

The introduction of fiat currency and its being made available at negative real prices effectively extends the production lag to an unfulfillable promise.  So the system self-destructs under the weight of its own debt. 

The rest of the system - the forward markets, securities, derivatives, etc., etc., - is just noise to me. 

slow_roast's picture

"This is why i rarely speculate on macro themes but use sentiment and divergence."

Yes, because the devaluation of the USD against hard assets isn't real.

Boston's picture

Can't wait for the 7yr and sub 3% 10yr.

Me too!  But since I've been waiting since late February (when I went long T-notes), I think I can wait another month or two.  

Also, keep this in mind---the BIG rate move (down) happened only AFTER QE ended last spring.  This means we could easily crash well below 3.0% and possibly below 2.5% on the 10 year.


6 String's picture

I just posted this on another thread: the 10 year at 3% while we're had a technical mandatory debt celing breach? You've got to be kidding me it's getting the kind of bid and coverage....

 I feel goosed.  Seems like we are on QE6, they just didn't tell you that it started.  And we have seen this before. 

I couldn't agree more. It's like they know to keep ramping the Russell 2K, to keep a bid on commodities (remember Goldman just went bullish even though supposedly no QE3), and to outright play a QE3 hand--right now.

This is of course true: The Primary Dealers, as we have all suspected, will be far ahead of the curve on QE3, since they do, after all, call the shots.


Ye Ye's picture

I think the treasury yield is related to the expected future distribution of Fed overnight rates.  I interpret the price action as the market saying they expect the Fed to keep the overnight low for a while.  This in turn suggests the market thinks the economy is going to be in the doldrums for a while.  With the drag of energy costs, the arrival of austerity, and the end of QE2, things are definitely not looking up ... 

luk427's picture

Belarus is going to look like a walk in the park.

Herbert_guthrie's picture

"Fundamentals? Economic activity is mixed at best too."

Some Texas banker's son once quoted "This sucker's going down."

Best believe him.

citrine's picture


could it have something to do with the implied probability of changes to the fed funds target rate?

buzzsaw99's picture

bondz bitchez! (don't touch my junk either bitchez)

slewie the pi-rat's picture

Maybe, the severity of the litany of unintended consequences of this low rate coordinated policy...are more beneficial than the alternative of stakeholders perceptions how bad banking balance sheets are.

fuking banksters!  how styooopid are we to keep throwing money at businesses whose employees & owners take all the money home each week?

let's give them $3 Tril more and see what happens to their balance sheets? 

got PMs?

Gold Man-Sacks's picture

This is not rational behavior, but since when has the public acted rationally?  Once QE3 is officially announced, rates will once again spike.  I'd catagorize these exceptionally low rates as "transitory."

the grateful unemployed's picture

who is this everyone? do you mean the 56% of america living on the dole? those who also tdepend on national security? there are a few people who think everyone wins. and even gasoline prices are coming down. (that obama is a smart lookin fella isn't he?) that 56% who spend beyong their means is feeling pretty good. the savers and the losers who can't get credit are crying, of course. but pretty soon they're be educational grants to learn burger flippin at tech school, most of the grant is kicked back to the industry in one form or another, seen it before, and expect to see it again.the alternative is running an honest and bankrupt system. take your pick