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Portugal Yield Curve, Meet Kansas
And so, Portugal flatlines, and in fact is inverted in the outer years. The bond market is waving goodbye to Portuguese paper which is now effectively trading on the Pink Sheets.
Same thing for Ireland:
And below are the three horsemen of the Eurocalypse. Ironically the bond market is offering a far higher yield for ultra short-term Portuguese than Irish.
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Ireland/Portugal/Greece....whatever, it's all the same now...what's holding yields down ~10% ?
portugal 5yr cds breaking out to new highs
What's holding yields to 10%? Hope. The ECB (with the backing of Germany, big ass-umption) has the capacity to bail Greece, Ireland, and Portugal. That buys time. Spain? Neither Germany nor France have the capacity or political will to bailout Spain. The IMF (read: U.S.) theoretically has the capacity to bail Spain. So, could this thing get strung out until 2012? Sure. So, hope persists that, while time is purchased by the ECB (IMHO likely to occur) and the IMF (remains to be seen), the PIIGs and Spain can somehow cure their underlying economic and debt woes. Strong odds are, the whole thing fails. If the Euro-zone can pull it off, it will be the greatest comeback since [insert great sports analogy here.] And, oh yeah, while time is being purchased, Euro banks get to collect a 10% yield on Irish and Port bonds.
The kink in the works is Ireland. If Ireland forces haircuts on the European banks and other financial institutions holding bonds in Irish banks, then the ECB will be required to support those Euro banks balance sheets because of the writedowns involved. I haven't crunched the numbers, but I think the market believes the ECB may lack the capacity to bail the PIIGs AND dozens of ECB banks simultaneously. But if you're Ireland, why should you take that shit onto your country's balance sheet? Ireland is going to say fook it--fook the fooking ECB. And from the ECB's financial point of view that stretches everything even tighter, plus it's creates a precedent for the good citizens of Greece and Portugal to see and urge their leaders to follow--a political disaster. It's possible (albeit unlikely) that the IMF could step in and help the ECB deal with Ireland. That would create a precedent for dealing with Spain when it finally blows up (IMHO a very dangerous precedent).
It doesn't really matter if Trichet raises rates. A .25% raise is spitting int the wind. In the short term, a rate raise supports the Euro and attracts capital, but in the long (and probably medium) term it hurts Euro-zone economies. I think Trichet sees the Euro as a Deutsche Mark wrapped in a Euro blanket. The periphery countries have far deeper structural problems.
China has the capacity to bail them all out, they just need to wait for yields to max and step in...
What application are you using to chart this? (noob here)
bloomberg terminal.
If you have to ask you can't afford it
-JPM
+1
I've heard ~$1500/month. I'd love to have one if I had that kind of money.
Sell a kidney. That should get you a couple years worth of a bloomberg terminal.
what for, it's a waste of money. The markets are all fixed.
If you don't sit on the board of a primary dealer there's no way you can know what they are going to do at board level.
You lose, in addition to your $1500 cost...
might as well just buy gold. No risk there then and $1500 is a lot of storage fees...
More, $6,000/qtr...
And that's for basic data download capacity. The more data you want to download, the more you pay...
what for, it's a waste of money. The markets are all fixed.
If you don't sit on the board of a primary dealer there's no way you can know what they are going to do at board level.
You lose, in addition to your $1500 cost...
might as well just buy gold. No risk there then and $1500 is a lot of storage fees...
:)
Bloomberg Terminal - http://www.bloomberg.com/professional/hardware/
A special piece of hardware to pull data and chart? Are you shitting me? I just had a flash back to mainframe dumb terms.
Did you think Bloomberg is successful because of its news channel? This sucker is a cash cow.
I'm.. I'm.. sort of laughing.. Is there a way to gain access to the market data for free? and if it's not free, why isn't it free? Isn't this supposed to be a free market?
Free market?
Huh?
You've watched too many Obama speeches. There is no free market.
heh. tongue in cheek. I've never watched one Obama speech in full. Clips, yes; full, no. Can't get past the stuttering.
If you're outside of the states, you can get a demo spread betting account with one of the big players. Some of them provide relatively accurate market data on indices, fx, commodities, and equities.
It just seems like a whole lot of data control where it should be freely accessible.
Keep in mind realtime level2 data is almost never free. Practically all of the exchanges charge per endpoint for that data, and bloomberg is charged for each endpoint plus they pay redistribution fees to practically all exchanges they provide data for. A bloomberg terminal costs as much as it does because they offer plenty of additional functionality like their messaging system, realtime data and data analytics, and they combine data from many, many markets. It is the definitive tool for professional traders because of this.
"Free market" doesn't mean you get shit for free.
You can argue that market data shouldn't be as expensive as it is (B-berg just passes through those costs from the exchanges) but a lot of the data gathering and organizing is done on a proprietary basis by B-berg. They aren't the only game in town either, it's a pretty competitive business.
that was a tongue in cheek comment / connection. Don't read into it any more than that.
I don't know how it's all wired up, but it just seems odd that the channels that need to be taken in order to "give them money" (for lack of a better term) is "Closed" or prohibitively expensive, thus forcing us to use "banking"/"trading" instutions to do this for us (well, for the non-trader joe).
What is the mechanism that precludes the average person from trading? Why can't I go right to the source? It's like the banks. I can't borrow from the places the banks borrow. Instead, I'm forced to pay interest on money that was borrowed from the fed at 0%. Well, at least that's the feeling that get about how this is all wrapped up.
The exchanges make a huge sum off of the data they promulgate, the lower the latency, the higher the cost. This is core to the whole HFT farce. Maybe someday investors will wise up to street games and demand that companies' shares be exclusively listed, traded, and cleared through an exchange with a completely different structure, but don't hold your breath in the meantime.
Yahoo! finance got real time quotes and plenty of tools in the comments section
classic. hahaha
rofl. they probably think openbook ultra is the name of a new tablet pc.
http://www.bloomberg.com/apps/quote?ticker=GGGB10YR:IND
That's the greek 10 yr
Bloomberg gives you all the data for free, but if you want a nice graph like the flatline for all the different yields together you'll have to create it yourself copy and paste numbers into excel.
redpill
Yup. With roughly 250,000 terminals worldwide @ $1,500 a month that's a cool $375 million a month.
These days it could be replaced with a simple display listing NFLX and AAPL along with a giant red button that says BUY
Hell you wouldn't even need two screens.
where would you watch the porn then>??
daaaamn! on a roll hahaha
It also allows you to place trades directly.
http://en.wikipedia.org/wiki/Bloomberg_terminal
Yup...at some point using the word 'curve' is just disingenuous...this is that point.
http://www.youtube.com/watch?v=D_ImXLQCO20
How about slant or plane.
I wonder how many years it will take before the mainstream media picks up on this...
You really think you can explain "inverted yield curve" to the average X-factor viewer?
You can't.. I don't even have a fucking clue what it means. When I see the word yeild, I see shit like this in my head:
foreach(var item in collection){
foreach(var child in collection.children()){
yeild return child;
};
yield return item;
};
But judging from the responses, context tells me this flat line is a practical equivalent to death of an economy.
http://www.bloomberg.com/apps/quote?ticker=GSPT10YR:IND
This is easier to follow. Look at the 10yrs on bloomberg.
For portugal it's now at 8,38% on a 10yr. Anything above 4.5% means shitstorm.
Fund your liabilities now PIIGies
I "for each" for a living as well, so I will go out on a limb and observe what I think it is.
A curve is a series of points where each point represents an X/Y value (sorry to be obvious). The Y axis is yield in % terms, just like you pay "yield" on a credit card. In these cases we are looking at 2, 5, or even 10% per annum. The X axis is the maturity term of the debt ranging from 3 months to 30 years (haha).
With the obvious out of the way, less obvious is the fact the curve should, well, curve. Borrowing at 3 months is pretty low risk lending. Defaults are a big deal. So the interest rate on a 3 month bill should be "lowest". 10 years is a different matter entirely, as many, many things can happen in 10 years. So the yield is higher to reflect the risk of the longer time span.
When the curve inverts, that is when a forward point on the curve has higher risk/yield (its fun to exchange these words - they are equal in this sort of context), that means the market thinks bad things are afoot, like a possible default, and are pricing accordingly.
One other thing that I found quite tricky, since we are on the subject, is the price of the bond when you sell it. Consider if you bought a "Volker bond" back in the day at 10% from the US government. Consider you also bought a bond a couple years later at 5%. Which is worth more when you sell it? The volker bond has a lower "price" on the market because more of the the high interest. The bond with 5% has a higher price because it will earn less interest.
It is the opposite of what you might intuit; low yields == high bond prices and high yields == low bond prices.
So a movement where yields shoot up mean those that hold the debts are losing money as new bonds coming onto the market sell for less than the same bonds already in circulation.
This is required to understand by Bill Gross bailed out of his Treasury position; he thinks the price of bonds is going down/rates are going up. At least for a period of time (3 months - 6 months - 1 year - <shrugs>).
I am not a finance/econ/trader, so please correct me if I screwed any of this up!
Regards,
Cooter
you are correct, bonds go up and down just like stocks do, but the big difference is if you hold to maturity you get all of your money back. buying treasuries while they were yielding 10% would have been an excellent investment, bill gross bailed because taking into account inflation and the risk of all the government debt, the yield isn't there to justify holding
Here is my attempt at a simple explanation.
Lets say a country has 3 bonds.
They have a 3% coupon 3 year bond, a 4% 5yr, and a 5% 10yr.
Yield 3% 4% 5%
Price 100 100 100
So the above yield curve is 'normal' or upward sloping. Investors demand higher yields for longer maturities based on inflation expections, higher uncertainty, etc.
Now lets say the countries economy deteriorates a little bit and yields move 1% higher across the board (a parallel shift in the yield curve). Here is the new yield curve
Yield 4% 5% 6%
Price 97 95.5 92.5
The longer maturity/duration bonds move more in price terms for a given shift in yield.
Now lets assume the situation deteriorates further, say 2% more. Here is the new yield curve
Yield 6% 7% 8%
Price 92 87.5 80
At some point people start focusing on default risk. In event of default, each of these bonds only has the same claim amount - par. So if you think default is high, spending 92 to buy the 3 year bond may seem more risky than spending 80 for the longer dated bond. If there is a default the 2 bonds will have the same value. So in normal times, people only focus on yield, and future uncertainty, but in times of credit stress they start looking at the risk of non payment of principal.
Maybe at 8% the default risk isn't too bad, so the market prices it as a 'flat' yield curve. 8% across the board. The new curve looks like this
Yield 8% 8% 8%
Price 87 84 80
In a curve like this, investors still take more jump to default risk, but less than in a normal curve and it implies still some hope that there is either a positive resolution or they make it through to pay the shorter maturity bonds. At a price of 80 and yield of 8% that's not unreasonable.
If it gets worse again and we go to a flat curve of 10% we would have the following
Yield 10% 10% 10%
Price 82 77 69
At these yields, the risk of default is much higher. Lets assume that you believe 60 will be the value of bonds in event of default/restructuring. Then clearly the 10 year is starting to have limited downside (9 points) with big upside. It is also clearly implying a high probability of default. The 3yr bond at 82 looks horribly unattractive in this light. Why take the risk of 82 pts down vs 18 up, when you can have 9 pts of downside (if your recovery assumption is correct) and not only 31 points of upside, pick up an extra 2% per annum in coupon. So the market will adjust and you will get an inverted yield curve.
Yield 12% 11% 10%
Price 78 73.5 69
Now once again, the risk/reward can look more in line.
So, there is the thought process/rationale, of how the bond market moves from steep curve, to flat curve, to inverted curve and hope that helps explain why an inverted curve really is bad.
Exceptionally good comment.
thx
First comment I've saved to a text file :)
thanks for taking the time to detail the flow. Makes more sense now.
thanks. there are a couple little errors in the write-up (22 points of downside, not 82), but was done quickly, and the gist of it is correct and am glad it helped clarify as I have this feeling we will be seeing a lot more about inverted curves in the weeks and months that follow.
"Inverted" yield curve means that interest rates of shorter maturity term debt are higher than longer maturity debt - expectation would be in normal curve that the yields increase for the longer maturity periods.
For info on yield curves, including more explanation and examples of normal looking and inverted ones see e.g. here: http://en.wikipedia.org/wiki/Yield_curve
Wow
To get the balance: Faros - US Dollar Decline to Accelerate http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2011/3/30_Fa...
Interesting call by Faros....if QE3 is delayed they could be steering a lot of folks in the wrong direction. I don't see the Eur going to 1.50 though
Youri, great piece, thanks for the share.
TD: Isn't this chart Irish yield curves ?
The update corrected the charts.
Keep your hands off me lucky charms.
Looks to me as if there'll be a pot o' gold at the bottom when the chart forms a rainbow.
OT, but Just now on CNBC, Rick Santelli: "The Fed Can't Print Corn"...
but they can force us to put it in our gas tanks.
That one was quite accurate.
WOnder what benny thinks about that, but wouldn't want his brain to get too cluttered and get away from being a "useless thinker".
Highlights of latest Robin Griffiths interview, thinks USD will still take some time to loose reserve status and see's gold at $8000/oz
http://goldandsilverlinings.com/?p=415
Talkin about Griffiths http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/3/31_Robin...
I see Gold and everything else going to infinite Dollars.....
Gold is so undervalued right now in real terms. Same with silver. I just can't bear owning something that will tarnish.
Like it matters. The banks and connected bondholders will profit.
My first post on ZH, though a long time reader.
Portugal, Ireland, Spain, The UK etc. etc. What are the common threads?
Easy money, Bad banking, Housing bubbles and out of control government spending.
Makes you wonder how long the USA has before we are a big version of Portugal?
The difference is that the PIIGS will be forced to deal with their issues sooner rather than later by virtue of being part of the EU. The US on the other hand, can extend and pretend much longer because we print the (arguably already former) reserve currency of the world. This means we can put off our day of reckoning longer, but that it will probably be much worse when it finally arrives.
So long as the US$ commodity link holds within acceptable band the printing continues (overt or otherwise). When it is poised to snap as deemed by CFTC overlords - the SDR or some other quasi fiat basket will be rushed to rescue - see the Treasury Whiperer comments today re Pegs
"US Treasury Secretary Timothy Geithner on Thursday called for more flexible exchange rate policies at a Group of 20 meeting in China, saying it was crucial to global monetary system reform"
Welcome to Fight Club.
http://www.youtube.com/watch?v=fTyIKnRQdx0
Meanwhile, while the PIIGS countries burn.....
Nothing, I mean nothing, can stop the teen consumers from spending $125 for jeans with lots of holes in them. The kind that fall apart within 2 months.
LOL...
YoY you have a gain of $15. But you bought the fuckin' dip huh....bravo. So with the dollar losing its shirt, pants, and designer briefs, what does that make it? The King is wearing no clothes.
Fruitless endeavor trying to reason with 'Ol Catfishmouth, he sees a stock chart thats higher and thats all that matters! Nevermind the trader of rainbows a few weeks ago was a super bear. He saw stocks go back up and quickly reverted back to bullish...posting as if he bought the dips on all these random stocks. Talk about how that stock is actually down negative in terms of dollar purchasing power makes no difference as he is apparently Tylers cousin and long ago got chart posting privileges due to that.
Robo is alienated as an Austrian Economist at a Lord Keynes Convention.
Hahaha! "Blub blub blub!" Yuppers, he only says what just happened. Tyler's cousin, or maybe Tyler invented an algorithm that can type!
Classic head and pants chart....low out below...
Pink Sheets! -- God, that just reminded me of last year's bad oysters episode in the Keys...
How dare you guys dis the fine companies on the pinksheets. Bankrupt companies trade on the Grey Sheets,
Hmmm, CIA in Libya, lookie how Humanitarian assistance works so well with absolutely no unintended consequences.....
Libyan rebels sold Hizballah and Hamas chemical shells
Tags: chemical weapons Hamas Hizballah Iran Libyan rebels US Adm. James StavridisDEBKAfile Exclusive Report March 31, 2011, 11:24 AM (GMT+02:00)
Senior Libyan rebel “officers” sold Hizballah and Hamas thousands of chemical shells from the stocks of mustard and nerve gas that fell into rebel hands when they overran Muammar Qaddafi’s military facilities in and around Benghazi, debkafile’s exclusive military and intelligence sources report.
Word of the capture touched off a scramble in Tehran and among the terrorist groups it sponsors to get hold of their first unconventional weapons.
According to our sources, the rebels offloaded at least 2,000 artillery shells carrying mustard gas and 1,200 nerve gas shells for cash payment amounting to several million dollars.
US and Israeli intelligence agencies have tracked the WMD consignments from eastern Libya as far as Sudan in convoys secured by Iranian agents and Hizballah and Hamas guards. They are not believed to have reached their destinations in Lebanon and the Gaza Strip, apparently waiting for an opportunity to get their deadly freights through without the US or Israel attacking and destroying them.
It is also not clear whether the shells and gases were assembled upon delivery or were travelling in separate containers. Our sources report that some of the poison gas may be intended not only for artillery use but also for drones which Hizballah recently acquired from Iran.
Tehran threw its support behind the anti-Qaddafi rebels because of this unique opportunity to get hold of the Libyan ruler’s stock of poison gas after it fell into opposition hands and arm Hizballah and Hamas with unconventional weapons without Iran being implicated in the transaction.
Shortly after the uprising began in the third week of February, a secret Iranian delegation arrived in Benghazi. Its members met rebel chiefs, some of them deserters from the Libyan army, and clinched the deal for purchasing the entire stock of poison gas stock and the price.
The rebels threw in a quantity of various types of anti-air missiles.
Hizballah and Hamas purchasing missions arrived in the first week of March to finalize the deal and arrange the means of delivery.
The first authoritative American source to refer to a Hizballah presence in Benghazi was the commander of US NATO forces Adm. James Stavridis. When he addressed a US Senate committee on Tuesday, March 29, he spoke of “telltale signs of the presence of Islamic insurgents led by Al-Qaeda and Hizballah” on the rebel side of the Libyan war. He did not disclose what they were doing there.
Sterling down against everything except Iranian Rial. Guess where the next distraction/sideshow is going to be.
There's a reason DEBKAfile has so many 'exclusives' - they make shit up.
It's an Israeli propaganda outfit. Read anything they print with this caveat in mind.
If this is not a reason for Israel to go on a rampage in Gaza and Lebanon I don't know what is...
Too bad it is likely more disinformation.
It's Debka. The Mossad just told you what you should understand, and the context you should understand it.
Bottom line message?
Bad people are gathering and threatening Israel.
Israel must protect itself.....
So what will everyone invest in if not paper assets that are backed by nothing? Hmmm? HMMM?
http://lhmarketwatch.blogspot.com/
Socialism is now officially dead. Socialism always ends when socialists run out of opm ( other people's money). OPM is not going to buy bonds that wont be repaid.
+1
Yea the problem with that is unfortunately whenever socialism dies, about 3/4 of the population also dies soon after. Enjoy the food and looting riots coming to your neighborhood soon.
3/4? That seems pretty extreme, no? Are we heading into a repeat of the dark ages, or are you anticipating a global war or some sort? I could see a hyper-inflationary period, a collapse of the currency, and a period of anarchy, but I don't quite see the jump to global conflagration. If there is a war that draws a multitude of combatants, perhaps via MENA, and it happens before the dollar collapse, we may just avoid the death of the dollar.
3/4 isn't enough. We need to lose 6/7 to get back to a population we can sustain without continuing massive environmental destruction. All these years of holding back the law of survival of the fittest and we will soon have all that built-up tension crashing around us like a tsunami.
Natural selection with a vengeance!
(X)H1N1-MALTHUSIAN SOLUTION
You mean I only need to be in the top 25% instead of the top 1%?
You just increased my odds greatly - thank you, friend!
Well you know the difference between Communism and Capitalism?
With Communism the state banks go bankrupt and then they become Capitalists.
With Capitalism the banks go bankrupt and get nationalised and then they become Communist :-)
(true story)
BS! First of all you donnow what Socialism is cause you're Amercan and thus brainwashed into dislike of the word "Socialism" alone. And they did a good job at that, must admit.
Secondly: When the the top rich, who own most of the money don't have to pay taxes, you're bound to get flacked!
Best is a healthy mixture between Socialism and Capitalism and not Socialism for the Ultra rich and Capitalism for the Ultra poor squeezing them, like what's happening in the US of A now.
Like all of nature, humans behave in an opportunistic manner. That is why capitalism is the only societal architecture that is appropriate for humans. An opportunistic system (as in nature) allows for benefit to all… not a guarantee of benefit for all.
To say the lion is not meant to be the king of the jungle is overlooking the lion’s ability to hold that title. This is not to say that many creatures hold power over their niche area in life. The Great White shark is certainly one who has great power within his domain. On land though, he wouldn’t last long. Finding one’s niche opportunity in society is the key to success. Unfortunately, our education methods require an overhaul, and renewed societal commitment to education (not necessarily monetary) needs to be made to provide our children with the knowledge and drive to pursue their dreams. We also need to teach them that just because they might fail to succeed in one endeavor doesn’t mean they will fail in all. A person must have the will and perseverance to succeed, otherwise they relegate themselves to less than they are capable. Everyone has different strengths and weaknesses, some more marketable than others, and to think that a societal structure could “equalize” such differences is ridiculous.
In my opinion, the US crisis is mostly due to complacency and moral degeneration within our society. Capitalism hasn’t failed; we failed to protect our system of government from corruption. The tools are in our constitution… we just need to put them to use. As for the other countries, they need to figure out how to battle corruption for themselves.
Kansas:
http://www.tapestryinstitute.org/tornado/images/oz4.jpg
Bullish.... right?
Can they go down in PIIG order? that would be something. So bye bye Portugal
here piggie piggie..
for frick sake yes short the bull
so we are back to the pigs again.
EURUSD didn't make big moves. (WTF!?)
The TBTF's and Corps are flush with Cash but the Munis and PIIGs are broke. amazing how that works. This credit bubble is going to blow like chernobyl. (08 was the fukushima meltdown) leading to the kiev incident.
Open a small account at TD Ameritrade. They have a trading platform called Think or Swim that will give almost every US market real-time for free.
Good charting capabilities as well.
Dog