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Odds and Ends
The five-year TIPS closed at +.14% on Friday. I got a laugh out of that
price. The low yield a few months ago was -52 basis points, meaning
people paid big time just to own it. To those that did buy the negative
yield I say, “Suckers!” The yield on the TIPS has backed up by
66 bp in just a few months. In bond land that is a very big deal. It
will wipe out a few years of income.
What’s driving the back up in the bond market? Inflation? Inflationary
expectations? If that were the case Bernanke would be pleased.
Increasing inflationary expectations is a primary goal of QE. How is he
doing on that score? Lousy. The chart on TIPs since QE2 was announced.
Note that that the yield on the 10 year TIPS increased pretty much point
for point with the 10 year coupon bond. I read this as the market
saying, “inflation expectations are not the problem”. That flies in the face of logic, but never ignore the market and what it's telling you.
If inflationary expectations are not the cause of the very sharp run up in rates, what is? Answer:
The market sees the deflationary forces mixed with the
inflationary signs and trades it to a draw. The market is shooting bonds
because it is afraid and confused about the distortions that QE is
causing.
Thanks a lot for that one Ben.
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A quick look at a two-day chart of the bond futures. Just before the
tens and thirty year auction the market (aka the primary dealers) took
bond prices down by a chunk. My scribbles on this chart show the timing
of the actual results of the auctions. In both cases you see a spike up
in bonds post the announcement. Yields returned to the level before the
market smack down an hour or so after the auctions were finished.
Does this matter? No, not really. This is how it works. The primary
dealers are, in theory, taking a risk when they underwrite the Treasury
issuance. So the ¼ to ½ point they rip off the Treasury every month is
just a cost of financing. However, the Fed is on the buy side of the
bonds next week with more POMO, so how much risk do the PDs really have?
After all, a ½ point on $33 billion of new issue bonds comes to $150
million. That’s a pretty good payday for the street.
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The CBO produced a report on Friday that is worth a read. The title is: Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance. (PDF Link)
The conclusions from the report are not all that surprising. Our economy
and society will be screwed if we delay in getting our house in order.
What else is new? There was one chart from the report that struck me
hard. The CBO did an analysis of which age groups would be most affected
by kicking the can down the road policies. So who is going to be hurt
the most? Children that will be born after 2015. The kids who are not even close to being a twinkle in one’s eyes are going to pay for what we are doing today.
We should be ashamed of ourselves.
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There was no explosion in Ireland this past week. For the time being it
looks like the folks running the EU have a lid on things. I don’t see a
run on Spain in the near future. For sure the problems will reappear at
some point in the next few months. They have to. They are too big to get
buried for long.
If we are to have a period of relative calm in the EU it does not bode
so well for the dollar. Speculators have to attack something. If the fun
is out of shorting EU bonds then it is likely they will move onto
something else. Given that the US bond market has been in the absolute
crapper for five weeks there is a good chance those bored specs may just
lean on it a bit further. There is no better signpost for the US than
the bond market. If it looks like there is a fear factor on the 30-year
then it will surely translate into some fear of the buck.
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Lots of concern about Chinese inflation. Up a whopping 5.1% in the most
recent read. This might be the big story of the week. China is not going
to let food prices run up 10 or 20 percent in a month. There are too
many mouths to feed.
New reserve requirements, higher interest rates and most likely price
supports are likely to come. There is going to be an economic "J" curve
when this happens. When Chinese people see that the government is
reacting and some allocations are in the future it will result in
hoarding. When you have a billion people hoard a few pounds of rice it
makes for shortages. And that is when the problems really start. Just a
question for all you stock pros; if the Hang Seng drops 15% as a result
of this, what does the S&P do?
Note: I am the shopper in my house. Fresh vegetable prices are up
a good 20% in the past month or so. I have also noticed that there is
not the diversity of produce I am used to. Some of the stuff on the
shelves is well past it’s prime.
We live in a global village. If China is going to see significant food price inflation, so will we.
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The Chinese and other Asians have lived through much more "interesting times" than the US and Western Europe, hence they know that fright is a correct response in most instances.
I have been watching the chineese market too. Interestingly, IAE rebounded off the bottom of the bands, CAF is still hanging around. My thoughts are too see if China's announcement on rates this weekend is priced in and we rebound on Monday.
If we see inflation, I wonder how much of it will Americans tolerate? 10%/year, 100%, 200%? I don't think people will have a problem with QE until something gets out of whack. People also may just get upset if we have continued QE and unemployment doesn't go down.
Inflation won't matter too much, as long as unemployment payments will cover the cable and cell phone bills.
A billion people hoarding a few pounds of rice...
Sounds about right. Gawdhelpus.
One has to realize that the amounts that would, on average, be hoarded wouldn't be that great: 1) space to store is at a premuim; 2) it's not like people have a lot of excess cash to toss at such purchases.
An increase in "consumption," but then a big drop off. Wait until the next year and prices would almost certainly be down.
I suspect that the bigger problem would stem from the govt trying to keep short-term prices from skyrocketing, which would then fan the flames of unrest (people would then think that there really is a shortage).
Buffer short-term spikes. Averages will, unless the System is upended, reassert.
Thanks, as always, Bruce. A few questions spring to mind.
1) How reliable has the bond smackdown/rebound been, and has it just occurred for the 10/30, or also shorter maturities? In other words, is this a tradable (albeit speculative) pattern?
2) How much of the potential hoarding has been priced into rice? Any intermediate-term trade there?
3) Finally, my gut tells me that Chinese inflation, and responses thereto, will be positive for the PM complex. You have any read on this?
My responses:
1) If you ask this question you should not be trading the TLT. That is not an insult. I don't think the average investor should play in this space. If you are a sophisticated investor (net worth $5mm) then by all means have a whack at this.
Don't short Treasuries unless you have a 48 hour time horizon. The negative carry to 'short and hold' is too high. The long side is also a timing trade. Do you really want to try that? There are easier ways to make a buck.
2) IMHO very little.
3) PMs will become (even) more volatile. They will be higher in one year. This will not be a straight line up. Once again, you have to buy low and sell high. When has this been easy?
Thanks for the reply. I've stayed out of T-bond futures for all of the reasons (I suspect) that you advise average investors to stay out. Just wondering about the prospects of a very small swing trade: short a few hours before the auction, buy the auction and out 1 hr later.
dupe.
My guess is you're talking about a remora trade, where you're hoping to swim alongside the great white and pick up the scraps of his meal. Always risky, but my guess is that you're not swinging for the fences on the trade. With small bets for small rewards on small swings, the risk is limited. Remoras do just fine. You just have to swim at the right spot on the shark. Don't bee too far out front or too far behind.
i reckon you are better off benefiting from the long-term trend trade. Remember, Gary Bielfeldt bought bonds early in the 80s and never got out (becoming a 'market wizard' of considerable wealth). Since it is very likely that we have already seen the top in 30-year T-Bonds, one may consider averaging into a short position and keeping this position in some form or fashion until rates are raised to 20%.
How can a Joe Sixpaque short 30 or 20 year zero coupon bonds?
there are no barriers to entry to do what i do, which is to have an account with a Futures Clearing Merchant, and then buy and sell contracts on exchanges such as CME Group's Nymex, CBOT, and CME, as well as on Eurex and ICE, etc.
http://www.futuresbuzz.com/fcm_accounts.html
here is mine:
http://crosslandllc.com/index.php?q=node/3
it took from 1981 to NOW 30 years to go from 15% to 3%, (multiplier of 5 times)...just HOW LONG is the most likely time to go from 3% to 20%? Hoping for Hyperinflation? that is the Black Swan, not the most likely..
""the market can stay 'irrational' longer than you can remain solvent...""
its easy to stay solvent when sitting in a winner. i've been short from the top. I trial-and-errored it until i got the right position. I'm short. Its a big winner already. unless we return to previous 2010 highs, then i am staying short Treasury Bonds PERMANENTLY.
in the long-run, "nobody is bigger than the market." ...NOT EVEN THE FED.
checkmate.
It's a very hard trade and if you have a real day job like the rest of us there are easier ways to make money plus the pd's governments and big banks play in this area. It's better to play in markets with less sophisticated investors such as pm's or do a few spreads at possible inflection points. I am very afraid of the big boys because they are smarter and more experienced than me. Commodity futures are tough. I prefer to make some chicken scratch with option spreads. I'm impressed with you guys who trade bond futures because there are some big players gunning for you.
Worth repeating.
10 Year is best bang for the margin dollar........CBOT contract size $100,000 can be traded with <$1000 of day trading margin.
If a trader can have an address in Canada or offshore the US 10 Year CFD can be traded in increments of approx $10,000 through CMC Markets, a licenced securities dealer........however the chart package is weak as it is short on historical data outside of fx.
Spreads are higher than futures but CFDs are a boon for small traders wanting to play across all commodities and be able to have flexability with position sizing from oil to gasoline to interest rates to sugar to indicies.......CFDs not permitted in the US.
Margin is a tool.........BK is right but the counter argument is that many with $5 million probably know nothing about trading commodites, however fx offers correlated opportunities and accounts can be set up for trading micro ($1000 lot size), minis ($10,000 lot size) or standard ($100,000 lot size).
Self-employ yourself in fx and wakeup early to trade London, then double shift into the New York open. Asian session starts at 7:30PM ET.
There are different trading styles too and some can be paired, ie.,went long the EMini SP and scalped the MiniDow for several short trades........Depends what works for you and who you read. That takes time to figure out.
Fat finger. Sorry. Also slow servers at zh..........
10 Year is best bang for the margin dollar........CBOT contract size $100,000 can be traded with $1000 of day trading margin.
If a trader can have an address in Canada or offshore the US 10 Year CFD can be traded in increments of approx $10,000 through CMC Markets, a licenced securities dealer........however the chart package is weak as it is short on historical data outside of fx.
Spreads are higher than futures but CFDs are a boon for small traders wanting to play across all commodities and be able to have flexability with position sizing from oil to gasoline to interest rates to sugar to indicies.......CFDs not permitted in the US.
If hang seng is down 15%, S&P should be up a minimum 20%, hell we might even break the highs of 07.
thanks for the post. bruce gets my vote as co-mvp of this site.
Florida has been hit with weather that zapped tender fresh veggies like sweet corn and bell peppers, so fresh food is going up.
+1
Unfortunately, Bruce only has knowledge, understanding, and analysis. Ben has a PhD.
Does Bruce have a PhD?
If not, we'll have to go with Ben on this (facts be d*mned).
In fact, the Bond Market doesn't have a PhD either. Definately need to go with Ben on this.
LMAO. Classic Mikla.
+1
You are all wrong. No credentials matter except your TBTF which means you operate above the law, don't need brains, and no matter what you win with record bonuses for extorting and blackmailing others with your TBTF credential.
i really do not understand why any of us are allowed to short the Treasury Bond market without a Phd. we clearly do not have the appropriate credentials.
At this point, you're better off with TBT than PhD.
+1
yes, if you are going to take out a loan, spend it on a TBT rather than a PhD.
China is a planned/command communist/fascist economic unity...
.'market mechanisms where efficient allocations at the 'detail-level' are needed....
but 'Command Economy' including 5 year plan goals and including buying 'bread/food' for the masses FROM THE USA, using USA $...
.hell USA sold USSR wheat from 1950-1970 (?) the Ukraine Wheat still not enough from the Stalin purges of Kulaks in 1929,
to Hitlers twice-over total annilation of farms/equipment/people in1941-44...and THEN in between USSR ALSO annilated Ukranian lands WW2 to prevent the Germans from benefiting...
China can BUY rice/wheat/other food with dollars,
indeed a stategic stockpile of dry rice, beans, wheat, sugar, would make a lot of sense...BETTER THAN HOLDING USA PAPER, no?
No, no, it's even worse than that! Don't you remember that erudite analyst for the Fed who earlier this year scathingly criticized all us non-PhD ubermenschen as unqualified to even TALK about the economy and the Fed's actions? In fact, I bet we all here are not even worthy of merely THINKING about the Fed! I mean really, how dare a lowly (non-PhD) human judge God?
akak:
I think you mean all us non-Phd. "untermenschen"
Two master's degrees (MSEcon, MBA) plus BSEE doesn't cut it...
In Deutschland I would qualify as a "Dipl-Ing." )Someone who knows how to make things..but I just trade paper...
KrvtKpt. laughing swordfish
DKM Trading
Swordfish,
"Untermenschen" was indeed what I meant to say.
See, there's that lack on my part of a PhD showing again!