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Treasury Market Commentary
Some intraday Treasury market commentary from Market News. Everyone's word of the day is steepeners (except for Rosie, who loves the flattener. As usual he is on to something, although the "don't bet against the Fed" mantra should be amended to "don't bet against optimistic groupthink"). Don't fall for the call stupids.
Flow bias revolved around better upside interest for another session Tuesday, accounts looking to hedge for grind-up in the underlying with the opinion the Fed will be on hold at least to middle of this year.
Better call interest included a scale buyer of some 15,000 June 99-50 calls after the same account bought some 40,000 June 99-62.5 calls at 3.25 to 3.75 last week, locals bought 10,000 September 99-12.5/99-50 call spreads on a 1x2 basis for a net of 10.5 while a London fund bought 7,000 June/September 99-62.5 call stupids, paying 9.0 to buy both calls.
Later in the session, a New York shop bought 10,000 short March 98-50/98-62.5/98-75 call trees at 1.0 while a New York based French shop bought 10,000 short January 98-37.5/98-50/98-62.5 call flys at 2.5.
Curve plays had a New York dealer buying the March 99-25/99-50 call spreads over the short March 97-75/98-00 call spread, paying 4.5 for the conditional front end curve steepener.
Of note, deferred 1-year spread received some play on the session with screen volume in the September '10/'11 spread is up to some 45,000 in late trade.
Despite the flattening in the spread from recent highs, (spread had a 6.0 bps range, at 150.0 last vs Monday's set of 156.0), a couple desks said paper leaning towards a steepener, in line with recent conditional curve interest in options.
Meanwhile, Treasury options saw some decent put interest go up,
bias mixed with a New York shop buying 10,000 February 10-year 113.5/115
put spreads on a 1x2 ratio at 13/64 after the bell while paper sold
4,000 February 10-yea r114/115/116 put trees at 16/64 around midday.
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What is a call stupid ?
when you buy both. for instance, the feb 113/114 call stupid is buying both the 113 and the 114 call.
a tree is when you sell the first one to buy the second two. for instance the feb 113/114/115 call tree would be selling the 113 call to buy the 114 and the 115 call.
these are referring to treasury bond futures on the cbot floor.
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that's a lot of commissions being racked up...
Rosie is going to be dead wrong on this. Long treasuries are going to take it right in the dumper. How can ZH, a few days ago, post about how treasuries are just a big ponzi scheme per Sprott, and couple days later, that Rosie is right and long treasuries is a great trade?
Because you always make the most money on interest right before the system crashes. Think how profitable Wild haired new york casino and hotel owners where right before they filed bankruptcy. Trump dump.
We said go long Treasuries? Where? We have pointed out that a flattener play may be sensible in light of everyone being on the other side.
Tyler, if everyone was really on the other side, then the 30 year wouldn't yield 4.6%, regardless of Fed QE. When everyone is REALLY on the other side, you will know it. I am betting that will start becoming evident soon....
The shit will hit the fan when Treasuries fall significantly, causing equities to correct....
Gee, Herd Behavior much man? You say no bull, perhaps you mean all cow.
But to be serious about it, all the rates have a correlation to each other, it's ridiculous to think that you can have 0 on the short end and 7 on the long end, at that point, hand your wallet over to any lending agency, because everyone will start borrowing short and lending long.
and sorry to repost, but those who are familiar with me know why -
If you demand higher yields (as an American), you're effectively demanding higher tax rates.
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Our tax dollars pay the coupons on treasury bonds.
Higher yields mean we need to make higher payments.
Higher payments mean we need to pay out more dollars.
Paying out more dollars means we need to obtain higher tax revenues.
Higher tax revenue requirements mean higher taxes which effectively would hit the upper classes more than the lower classes in revenues (despite the poor paying the higher interest rates at the margin for interest costs in company expenses passed on to the consumer).
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So NOW, let's look at this from a microeconomic perspective.
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The American investor gets a higher yield.
The coupon rate has now increased. (Fr (face* rate) at time 1 > Fr (face* rate) at time 0)
The amount taxed has now increased. (TaxRate * Fr (face* rate) at time 1 > TaxRate * Fr (face* rate) at time 0)
But due to higher interest costs, the tax rate has increased (TaxRate at time 2 > TaxRate at time 1)
Therefore the Return on Investment has decreased (CouponPayment - FR*TaxRate(2)) < (CouponPayment - FR*TaxRate(1))
- <assuming the increase in taxation exceeds the increase in yield, this may not be the case, but if you consider your aggregate income, the case becomes clearer>
So, since American's are demanding higher yields to invest in their own country, they are demanding a lower return after taxes.
The American investor now receives a lower total yield.
But there's more.
Do foreign entities pay taxes on American Treasury bonds? I don't mean foreign investors, I mean Foreign Central Banks?
Somehow, I doubt it.
SO, Foreign Central Banks have a TaxRate=0, therefore (FR*TaxRate(2) = FR*TaxRate(1)) = 0
Effectively, Foreign Central Banks receive a higher payment, meaning a larger outflow of capital from the United States or more succinctly, the American Taxpayer.
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I haven't even begun to discuss how this affects corporate revenue.
Rosie is going to be dead right most likely, along with El-Erian and yours truly (although who the hell am I? :P)
But ZH saying go long treasuries??? Are you smoking crack? I've been consistently bashing anyone bashing treasuries, and some members of ZH are included in that (despite the fact they have my undying admiration and respect - you know who you are)
Looking breifly at historical record steepness in the curve, it does not seem the conditions (in the mid 90's and 00's) persisted for more than a month. Our curve entered record territory a few weeks ago. So if we do not begin a flattening trend we will have record steepness for a record amount of time. I'm not a sophisticated enough trader to put odds on thisun, but I would say it is logical that the flattener has more risk-reward at these levels.
This is not your father's steep yield curve.
It does not necessarily portend growth, but rather signifies drag. Unless, of course, one is so inclined to believe that all the new and pending Treasury issuance (not to mention building state budget gaps, health care, pensions, etc.) do not translate into the Great Leap Forward & Upward in tax rates.
Here's an early call for your consideration: how long can the tax-free allowance of internet commerce sustain the inevitable clamoring by state and local officials for tax income, especially in light of the recent drop-off in sales tax receipts, and other budgetary pressures?
Not to worry. The implementation of a carbon tax and a VAT (with revenue sharing for the States) will temporarily put an end to those worries.
"Here's an early call for your consideration: how long can the tax-free allowance of internet commerce sustain the inevitable clamoring by state and local officials for tax income, especially in light of the recent drop-off in sales tax receipts, and other budgetary pressures?"
I've been wondering the same thing - and have found NOTHING on the subject.
It seems like something would be done in this area - esp as internet sales are INCREASING and "bricks and mortar" sales are DECREASING.
I'm guessing that usage taxes collected by the states is NOT reflecting this.
I live in Cook County, IL and our sales tax rate is 10%. I know a lot of people who are interested in saving 10% on purchases.
Well stated. The morons are also failing to take into account the flight of foreign participants from the long end (5-10-30) to the very short end. The decade charts of the 1,3, & 6 month notes are eye openers and this is the longest period of time in U.S. history that the yields for all three issues has remained below 1.0%. Does this sound like the "money on the sidelines" trusts these aholes in DC and Wall Street? Hardly. Everyone I know is working to move money offshore and only use the casino on Wall Street for very, very short term plays or dabbling in currencies.This is not going to end well the minute one of our long bond auctions has a BTC of 2.2 or lower. The equity markets will crater like George W. in grammar class.
The level of ridiculousness of the stock markets is... I don't know appropriate adjectives to describe it... other than March-of-2000-ish...
Will a historically steep yield curve shrug off the realization that the "recovery" was nothing more than inventory re-stocking and .gov stimulus?
I don't think so. And neither does Rosenberg.
At ZIRP, the curve can flatten in one of three ways.
1) Long end comes down 2) Short end goes up 3)Short end goes up faster than long end.
Since there is zero percent chance of either #2 or #3 happening as long as Shalom has an office in the Eccles Building, I am betting on #1.
If we go to a flattener it will be lead by the short end and fears of FED tightening as pension yield pigs will hold in backend until such time inflation is so evident that it explodes (low prob event right now). Think Tyler believes the Boyz will opt to tank equities to underwrite the global shite storm of supply coming and flatten curve by long end out performing on a flight to bond trade....weeeee!
"flattener led by fears of FED tightening"
You must be kidding.
Any amount of meaningful "inflation" will be more than enough to immediately send the economy back to the floor on its ass. With Shalom repeating "inflationary pressures are unlikely to persist" (correctly) the whole time.
We will get a HUGE bond rally, even if we have to suffer through some brief inflation and a short-lived bond sell off first.
4.60%, 5.60%, 6,60%, 7.60% at what yield (real) would you buy 30 year paper given the demographics and current/prospective fiscal position of the USA? Are we living in a vacuum or are we still part of a complex (gamed) system? Do we have to show one year performance records or can we (attempt) to look beyond the immediate future? Seems a little difficult to try to forecast with any hope of precision. Maybe if we recognize what we don't know or can't know.......
DOH!!
Let's see.
Does the US need to issue about $2.5T in 2010?
Will the US continue to need tons of debt issuance in the coming years?
Do you believe that the gang (FED, Treasury, TBTF banks) is able and willing to manipulate the markets?
What would happen to Treasuries if the stock markets crashed? Think short term - "flight to safety" - and long term - "repulsion" of stocks as an investment vehicle after three collapses in 10 years, the last two in less than 2 years.
BB says he wll not QE anymore, which means he will QE, which should keep a floor under bonds. Bill Gross and all the agencies say that LT rates will rise, which means they will not rise. By this reasoning, and since short term rates can't possibly go lower, that would favor the flattener play. I also favor the 5 horse in the fifth race on the fifth, if anyone is interested.
By hook, crook, whatever....the Fed and US gov't are all in on keeping rates low for housing. They will do whatever is imaginable to keep long term treasury yields down.
They are not pulling back on this bet and for the short term don't expect long term yields to get much higher. 30 yr fixed mortgage rates > 5% are not acceptable to the current oligarchy.
exactly.
and to further this point sleep well in knowing you have possibly the most powerful institution in the world nonetheless ensuring this.
i cant see the 10yr going much higher here and definitely not above 4.25 as long as this administration at the fed is in place given the current environment.
another point. could they have found a solution with the term deposits ? can the banks really be forced to soak up the excess demand for the longer dated stuff? if this proves to be the case then bernanke may be a genius (ducks...)
You are kind of making my point: Bonds are money, just a little bit funny.
As long as the Fed agrees to buy them at any time by supporting their price, bonds are same as cash. They are risk free alternatives to cash, minus maturity risk. Bonds are tradable, and you can pay taxes with them at their conversion date, same thing that money can do.
The only thing that the Fed does is muck with with average maturity of the mix of bonds, notes, bills and cash, with cash having the shortest maturity. The Fed buys one, sells another. So the more sovereign debt, the more money. As long as the sovereign debt is not extinguished. Seems like it neve will.
A flattener could be bill, notes, and bonds all yielding 10% after all.
It does not necessarily mean .10% yields.
Not hard to see short term yields going to 2% given the funding resistance.
interest rates and the curve will be whatever the fed wants regardless of exogenous economic or financial considerations to the monetary forces....it is very easy to do with the irs market....
Anybody here thinking "covert" flattening?. Why does every one here,despite mostly are sceptics,but still comments as if the market is operating freely and equilibrium prices are achieved through market demand and supply?