Gleacher Head Of Rates Shares A Very Bearish Outlook On Treasurys

Tyler Durden's picture

From Russ Certo, head of Rates at Gleacher & Company

Good morning.  Quick update of views:  Having just returned from being out of the office for a week, I have a few observations. 

First, In light of all things Japan and even Libya, sometimes we have to separate the compassionate elements of developments and the ebb and flow of news with the daily reality of investment decisions. As I was leaving for a week away from computer screens, kindly recall the investment thesis that commodity leadership in risk asset arena, infrastructure plays, rebuilding, military deployment, general belief of cooler investment minds prevailing, led us to recommending cautious addition to risk assets and the consequent negative implications for “risk free” or industrialized G3 bund, gilt, Treasury space.  We told you we would let you know how it went.  It went well.  Really well. 

As I arrive back and survey markets and prospective opportunities, I see the U.S. Treasury market down nearly 10 consecutive days in a row.  Although, I believe SUBSTANTIALLY HIGHER  rates are here come in the intermediate future, I feel asymmetry exits in the next 72 trading session hours and into next week.  Let me explain. 

Market price action is often about positions.  Whereas, a week or so ago, it was not “politically” acceptable to explain to your committee or boss to be short during a nuclear meltdown, emotional purchases occurred at high end of range and may have cleaned out shorts.  However, now the technical profile likely has changed meaningfully. 

I also view the technicals as asymmetric in the sense that there is an event to occur, actually two events in the coming days, which COULD prospectively upset prevailing views or positions.  First, payrolls with private payroll consensus expectation of 210,000 gains, also begs of crowded view, particularly in light of 9 trading session in a row of lower prices, a 3% move in price in 10 year notes in a string of consecutive sessions.  I put out a support level on 10 year notes yesterday afternoon that held despite apathetic activity in volume and markets since. 

Further, and hesitate to be so pedestrian, but a winter storm warning is in effect for Thursday night/Friday morning in the NYC metropolitan area.  I don’t know if this is some sort of sick April fools joke, but forecasters are predicting as many as a foot of snow in the Northeast at the end of the week.  I can just see traders struggling to manage risk, cover positions with payroll risk on the books heading into the weekend.

I also will simply observe that commodity market leadership weeks ago was powerful leading indicator and leaded equity bourses HIGHER.  Now, it appears that the leadership is waning.  Copper, for example is down 2% today and most of the complex has been mixed at best in recent sessions. Even oil flattish.  This somewhat counters equity melt up, which was investment thesis a week or so ago.  Don’t’ know what just happened but there has been a multiple percent pullback in gold and silver from this morning as well. 

Please don’t confuse a NEAR TERM thesis with that of intermediate or longer term views.  I would feel more comfortable with better prospective location, lets’ say, after a weaker than EXPECTATIONS payroll report to have better location, let’s say 2% or 3% in price, to re-establish shorts in fixed space.  LOCATION, LOCATION, LOCATION.  And this does not make for an exciting investment thesis going into payrolls but I prefer better entry points for the bears so that pigs don’t get slaughtered on the 10th day of a sell off.

Longer term investment thesis?  I firmly believe higher rates, substantially higher rates, are forthcoming.  For those of you that have followed my work for years, I was a steadfast interest rate bull, for nearly a decade, despite market proclamations of higher interest in past several years.  I have officially turned to a bear and I think for years to come, so, the interim blips are just that, opportunities for better location to lighten up on duration. Remember when your Mr. “doom and gloom” constantly berated you with anecdotal headlines of prospective risk asset and economic deterioration,  risk deleveraging prospects, and imbalances of asset valuations.  Did you ever think I would become the bull in risk and bear in fixed space?

The way I look at it is there is NOW a low priced or inexpensive option.  If the economy gets better on a slew of better earnings and earnings growth and economic recovery, investment cycle, ramping of GDP, inventory building and the like, rates go higher.   Possibly, MORE IMPORTANTLY, if the economy doesn’t continue recovery, the trashed/trashing of balance sheet becomes even more onerous in applicable sovereign debt crises FOR THE UNITED STATES, that’s right, just like Club Med Europe. 

You see, every moment, literally every minute, that passes, the imbalance of U.S. government budget balances has transcended sustainable deficit levels.  Here in the U.S., NON-DISRETIONARY spending represents near 65% of all budgetary earmarks and spending.  These are the fastest growing entitlements and from the highest base levels of Medicare, Medicaid, Social Security and defense spending.   So, the fastest and largest portion of our ledgers are exponentially getting larger by the day which will transform into a credit proposition for the U.S. government and unsustainable interest payment as percentage of GDP. 

Yes, this has been discussed at nausea for years, and decades and is fashionable order of the Tea Party day at moment.  But unsustainable spending really has crescendo(ed) into the point of no return.  We can discuss the numbers. And it is all about the numbers which support these claims.

Here’s the challenge.  I don’t see anyone protecting the value of the 30 year bond, unless recent Fed ruminations of various tightening schemes in the form of asset sales, matched  sales, Treasury sales exist has teeth.  I see 3rd wars, global rebuilding and the largest part of U.S. budget, non-discretionary spending, not being addressed by the latest Congressional budget.  So, the upshot is that if the economy does better, higher interest rates are in order as this rate structure is simply too low.  And if the economy does worse, ledgers are so trashed that the “risk free” rate becomes more of a high grade credit expression or high dividend yielding perpetual asset like equity expression as a better storehouse of wealth.

An entire camp of investment managers, likely leveraged, may subscribe to return of equity earnings growth but possibly more importantly is concerned about attempting to not be devalued by central bank monetary and government fiscal policies.  They are attempting to re-allocated to assets that perform during massive debt restructurings, dilution of paper currency, and prevalent monetization of the debt policies.  This is what befuddles the bearish equity crowd and is what is perhaps missing.  It’s NOT about earnings. It’s about hard assets or perpetual assets embodying a measure of protection from these asinine policies.  Every day that a creditor becomes marginalized has a zero sum transfer to lowest level of capital structure, equities.  They are the new risk free assets not industrialized trashed sovereign rate markets. 


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TaxEstate's picture

Just another reason to continue melting the stock market up. No reason to buy bonds, no incentive to buy Cd's or put into a MM fund, real estate is still crap... That only leaves the circle jerk that is the speculation in stocks and commodities... Way to go, Bernanke.

Highrev's picture

Now if only the Fed can just get the rest of the world to play along.

edwardscpa's picture

That last paragraph just struck a chord with me.    BTFD I guess.

10kby2k's picture

Why the fuck haven't treasuries meaningfully sold off?

Fed or no fed. 

Tater Salad's picture

Treasuries haven't and probably won't sell off much...remember, they're the talles midget in the room.



truont's picture

[Equities] are the new risk free assets not industrialized trashed sovereign rate markets.


Boston's picture

He's right, but not in the immediate short-term, ie. the next 60-90 days when QE2 winds down.

In 2010, when QE1 ended, the funds freed up from the sale of risk assets  flocked into Treasuries.  There's no reason why the same thing won't happen this time.  Where else can hundreds of billions of dollars go, quickly and efficiently?

Later, when the Fed steps in with QE3, the reverse will happen: money will stampede back out of Treasuries, and rates will resume climbing.

Go long Treasuries in anticipation of Risk-Off after QE2 ends.  Then go short Treasuries as the Fed prepares to launch QE3 to "help" the markets regain their lost ground.



lincolnsteffens's picture

Boston boy, I hope you are right. I have a small position in TLT and a buy stop on TBT not far from the old inverse when the TLT peaked. That is one of my short to mid term strategies. I am however considering living a less active life of trying to figure out how to stay value positive in an inflationary environment. Translation- own primarily physical precious metals and, in the words of that great philosopher ;-) Timothy Leary, "Tune in, turn on and drop out." All the daily crap I have to sift through to feel in control is starting to wear on me. This is no way for a human being to live.

ghostfaceinvestah's picture

Exactly, why is this so fucking hard for people to understand?  Are people immune to the fact that Bernanke is printing $7B DAILY to prop up the markets?  What happens when that ends?

You got it, Spring of 2010 all over again, and if Bernanke doesn't step back in with more QE, the selloff won't stop until S&P @600.

zaknick's picture

You mean 666.

They are the 666 banksters from he'll (shit, maybe even reptilian!).

buzzsaw99's picture

He called equities "hard assets". heh

Johnny Lawrence's picture

What do you know...another bond bear.

rayban's picture

The only perpetual asset I know is a Consol. I guess somebody considered Enron and Lehman perpetuals too...

brandy night rocks's picture

The argument about reallocation into equities as a currency-devaluation defensive trade is sorta compelling, but if it were true wouldn't you expect the allocation to be more to blue chips with strong balance sheets?  But the real growth in the retardo meltup since Jackson Hole has been in the ultra-speculative space.  Run the Russell 2000 vs. the Dow since last September.


WTF do I know, though?  A look at my performance over the last two years will tell you how a contrarian thesis fares during a centrally planned rally.

ghostfaceinvestah's picture

Why hold equities at all during a currency devaluation?  That might have been necessary in Weimar Germany, or Zimbabwe, but in our markets you can easily get exposure to commodities directly, bypassing the corporate middle men.

That being said, if/when QE ends, it will all go to shit - commodities, PMs, equities, etc.  Bonds will be the asset class to hold.

NotApplicable's picture

"Gamblers place your bets!"

As Trav said yesterday, "why produce when you can instead participate in the government sponsored ponzi?"

Oh well, who needs real wealth anyway, when there's always more chips to be collected?

Tater Salad's picture

2010 Redux, hold on to your chairs boyz...gonna get bumpy sooooon

Urban Redneck's picture

In the past, the Bernank and his predecessors had a group of friends, the Crises, that they would call for push when they got stuck in the mud or snow and didn’t want to burn out the engine on the Suicide Machine.  Right now there is whole gang of Crises milling about- Libya, Bahrain, Egypt, Syria, Iran, Fukushima, PIIGS, but none of them are pushing foreign money (gas) into the US engine, because the US$ is no longer viewed as a safe haven.

bankruptcylawyer's picture

 perhaps it is correct in the horizon of months. in the long run it is wrong.  just because debtholders are losing doesn't mean it is a zero sum game with equity holders . my friend, everyone can lose together and they will.

in a real bankruptcy the equity holders get wiped out, before the debtholders.