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Many Questions - No Answers
Another absolute pasting in the bond market today. I have been
anticipating something along these lines, but this is happening much
faster than I expected. I suspect we are near a tipping point . Either
the run on the long end abates and we find a new trading range or the
30-year is going non-stop to 5%.
There is an interesting little sideshow developing. QE-Lite is getting
smaller by the day. This program is the balance sheet top off of the
original QE where the Fed bought MBS. Mortgages prepay when interest
rates fall. But the rate of prepays declines sharply when rates go back
up. In addition, the mortgage gate problem has gummed up the process and
we are now in the holiday period where, by recent tradition, the
bankers prove they are nice guys and suspend all foreclosures.
How much are prepays declining? How much does it knock off the estimates for QE-Lite related Treasury POMO buys? Good
questions. You can be sure that there are a bunch of deep thinkers in
the bond market who are trying to figure this out. There were estimates
that this would total as much as $300b through 6/30/11. Whatever your
estimates were, you have to cut them today, by a third to a half. Does
it matter if the sum of QE-2 and QE-Lite is reduced by 100/150b
(10-15%)? I’m not sure. But it’s a new wrinkle in the puzzle.
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I keep
an eye on the relationship of the 10-year bond and the S&P. From
time to time this pair shouts out about stress. That the lines crossed
today may not be significant. But it is an interesting milestone.
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Last summer there was a period of time where the bond’s performance lined up perfectly with the S&P. Strong bonds = Weak stocks. Then the correlation went away. But now it has come back. It is the exact opposite today than when it was warm. Now we have Weak bonds = Strong stocks.
Does this mirror image repeat performances mean anything? We shall
see. In the past, the correlation breaks (hard). The question is, which
leg moves where?
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Gawd, look at the TNX today. $6.7b in POMO and a couple of hours after it ends, it's 15bp off its lows?
Of course, there was that little intervening matter of the tax package passing the Senate.
Do try not to be an idiot. Just raise the level of scrutiny for housing above Lindsey v. Normet minimum scrutiny.
In fact, something like that may be in the offing, since, when attorneys pull their heads out of their asses, they will realize that the Supreme Court abolished the West Coast Hotel/Carolene Products scrutiny regime in Heller and McDonald.
Stay tuned!
Actually this was a Chinese central bank decision to raise US interest rates.
The evidence is here: http://www.federalreserve.gov/releases/h41/hist/h41hist1.htm
Look at the line for Treasury securities held in Fed custody for "foreign official and international accounts". When this line increases, it means foreign central banks are accumulating Treasuries. In practice, China is about half the total.
Look at how the buying has slowed to a virtual standstill since mid-November, that is, since the launch of QE2.
Crucially, these numbers include Treasuries that the Chinese and other foreign central banks buy through foreign private intermediaries, which is how they do almost all their buying. Treasury's monthly numbers on foreign holdings of Treasuries by China and by all foreign central banks do not include indirect purchases and thus are totally useless.
Interesting. QE2 to get out from under
the Chinese? That would be a positive.
Could those dollars be running to Euros?
Certainly not silver, it's down 50c.
So much for the big squeeze.
119.58?
Doesn't that mean the 30yr is still trading above par?
I'd say that 9% move means nothing, much.
Yikes! 9% in six weeks is biblical in bond land.
i smell shrimp.
Nice article, Bruce. Here's another question, if I may. If the 30-year goes to 5%, what does that do to JPM's derivatives? There was an article I refereced last week which estimated that it hits them badly. In fact, I believe the word was "implode".
If that estimate is accurate, yes, things can happen a lot more quickly than many imagine. But I've been expecting it either this year or next, personally speaking.
Don't know JPM's book. But if we get to 5% on the 30 year many derivatives will be underwater.
The 30 year yielded 5% during the
housing boom in 2006 and this
economy is a lot, lot weaker.
Sumpin funny goin on methinks.
The only reason anyone was even buying bonds at such paltry ass rates are:
1. To front run the FED buys
2. The Banks had to buy to make any kind of profit
3. The FED has had no choice but to buy to pay Timmy
4. The safer bet for the little guy
I mean really, the 1yr has been paying 50 cents per $1000? The 3,5,10 not much better. People have been making the money off flipping the prices, not the yields. Well, those days are over.
The money will sit on the sidelines, roll 28day, 13wk, 26wk bills, or go back into the dollar, until the real rates reach a point where people will get a decent return for safer investment, which isn't as safe with the debt load, and deficits spiraling out of control even further.
The only ones touting stocks right now are brokers or investment firms, because they have a ton of shit to unload. Hopefully, the 32 weeks of outflows is the sign showing everyone to hit the door on stocks and not look back. Who do you think has been doing the stock buying with all those outflows? Brokerage houses for their own accounts. Otherwise, stocks would have collapsed months ago. Boycott people, Boycott the scum, or they will steal it all from you.
The bond meltdown is happening and it's being overlooked in the MSM.
Look at the slaughter in the muni bond world this week!
The wildebeests that were herded into bonds this past summer are now migrating elsewhere.
2011...Europe...Japan... the Wildebeest will be back.
So many metaphors, so little time to mix them.
You're barking out in left field..
That right hand don't hunt
Weak bonds=strong stocks? Sorry, just not seeing it. All we're getting is a bond selloff, and a totally limp "green close"--NOT what I would call a strong stock market.
Wither now for bonds? Well, now that's a pretty fucking good question! I can tell you this: blind bond shorting with the biggest crowd in a long time will probably not end well. TLT anyone?
No, there is certainly a mismatch in the sizes of the capital flows. Lots of cash is getting taken out of the bond market, and not nearly the same amount is landing in equities.
It's also not primarily an inflation or credit phenomenon. TIPS are getting creamed, too, while US CDS isn't going much of anywhere.
So...the mystery of the vanishing dollars. Maybe they're getting stashed under mattresses in Chinese and European banks?
The real carnage is in the muni market. Mish has a nice set a graphs on his site illustrating this. And in that case it is a credit quality issue. Though the drop in TLT looks dramatic on a one month time scale, looking at the last three years, the support is around 85 and the resistance around 105-110, so one certainly wouldn't want to short at the current level (~92). Just mean reversion it seems to me (we're around the 40 week moving average).
Well I guess since technically TLT (and the the 10 year and the 30 year) looks terrible, I'd have to have some reason from a fundamental perspective to think that the US govt is a reliable and responsible borrower and that I can trust it to manage its finances in such a way that I'll get my principal back, in dollars of approximately the same value as the ones I lent.
But I agree, now's not the time to short them.
And another thing...if you're China, aren't you dumping the crap out of your Treasury holdings to try and soak up a lot of those excess dollars?
The real sign things have gotten tough is not when rates rise dramatically, but it is when we see bondholders taking haircuts. Until then Wall Street says: "The little people can eat shit"
no no no, you've got it all wrong teddy baby, Wall Street wants you to have too much fun, at first:
http://www.google.ca/imgres?imgurl=http://www.toptenz.net/wp-content/uploads/2009/11/let-them-eat-crack-banksy.jpg&imgrefurl=http://www.zerohedge.com/article/wikileaks-loses-website&h=683&w=1024&sz=313&tbnid=XTlojqWf8XxgVM:&tbnh=100&tbnw=150&prev=/images%3Fq%3Dlet%2Bthem%2Beat%2Bcrack&zoom=1&q=let+them+eat+crack&hl=en&usg=__9cZhdt7524FFYlwtYKBatqGent8=&sa=X&ei=6ioITbGTKoupnQeA98Fw&ved=0CBsQ9QEwAQ
You know, like your
Chappaquiddick incidentqe didn't start well nor will it end well....bernankula is burnishing his credentials as a quack and a fucktard...but no matter, the banksters got their loot...
Cool tag. I'm totally stealing it for my desktop at work.
Funny that 10Y at more than 3.5% or 30Y trading below 120 (for God's sake) seems like the apocalypse. Maybe the "safe" money is feeling a little sheepish about missing all these nice equity returns and deciding to join the party?
Be interesting to find out how much punch is really left in that bowl.
I figure since the banks were made "whole" err hole but they still see a need to ransack a man's home while he's dying on his deathbed...not all is what it appears to be. I believe I heard a wise man once say, "prepare accordingly".
~I do not declare myself smart but surround myself with smart people. Zero Hedge is a blessing to all who seek the truth. May God have mercy on us all when this shit storm comes, there won't be a fan large enough to capture all of it.
Amen, +1 !
Here's a link to that story about JPM ransacking homes. . . . ..
http://www.komonews.com/news/local/111566364.html
Thank you, I am a buyer right here...
Gutsy play, catching a falling knife like that.
Honorabow Wheo have fire sale on Chinee Solah. Chop chop.
+100
.
The fact that we are 18 months into this so-called economic recovery and the Fed is scared to raise the funds rate even 1/4 point should tell us something.
Recovery is just around the corner!
Haven't you heard about the "green shoots"? Shovel ready jobs? Cash for clunkers?
V-freakin-shaped summer of recovery?
This time it's different?
Etc... etc...
"Fat" Larry Summers sat on the V with his brilliant ideas...
The Economy is now a lard ass flattened L...
It seems that the optimists see this bond market breakdown as a bullish indicator (rising yields on the long end of the curve must mean the economy's improving...) I'm always amazed at how many people miss the alternative explanation - loss of faith in the quality of the debt.
Still, I have to wonder where all that bond market money is going to wind up.
The game will end with someone under the proverbial piano. Well, maybe not so proverbial, but literally.
It will certainly end badly, however it ends.
+1
you cheated as music lovers everywhere
always enjoy a piano reference, even in doom.
There will be great joy post-Jubilee. ;-))
Too bad Bernanke didn't see that sign!
If you are young the answers are easy. Dollar cost average as much as you can sustain on a permanent basis and pray for a bear market and continual loss on your investments for ten years. You will be grateful when you are fifty that you kept investing into a ten year bear market in your twenties. If you are a little older like me there is no answer now. Make your bets and hedge.
This is spot-on (barring financial apocalypse of the sort often discussed here, but seldom witnessed). When the Bear / FannieFreddie / Lehman disaster was happening, I obviously sympathized with my parents but couldn't deny that it was probably the single best thing that could have happened to my retirement account, given that I managed to keep my job throughout.
If Treasuries break down, what is the safe play? Certainly not the dollar! Yet the dollar was up on the day? That trade will not last long, what is the next move? Dollar/Treasurie meltdown.
I think it is abouts time for the mother of all gold moves, at least the first of many to come.
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2010/12/14_KWN_Source_-_When_That_Happens,_The_Game_is_Over.html
@.."what is the next move? "..
ag