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Is The Treasury Selloff Over - Net Money Flows Into The TSY Complex, At Year Lows, Are Starting To Rise

Tyler Durden's picture


As the mainstream media finally made a big story out of capital flows after ignoring the topic with impunity for 33 straight weeks (of $90 billion worth of outflows), the question many ask themselves is whether last week's minimal inflow into domestic equity funds is indicative of a shift in risk sentiment, and more specifically whether the outflows in bonds will if not accelerate, then at least remain at their current elevated levels. Probably the best answer to that will come from looking at not only the price action of the most liquid rate instrument, the 10 Year, but the actual net money flows for all UST contracts. While the first can be done with any charting program, the second is slightly more complex and for that we go to Credit Suisse's Carl Lentz and Eric von Nostrand. 

As the chart below shows, as always happens when there are regime changes, the bulk of the actual money move occured well before the marginal buyers, or in this case sellers, managed to move the 10 Year Titanic around. What is curious is that the "Net Lifts" (red line) in the TY and derivatives basket peaked at the end of Q2, and has been declining ever since in a pretty much straight line fashion. We say curious because as the gray line shows, bonds actually continued their ascent, with yields approaching 2% in the start of Q4, and just after QE2 was a go. Indeed, nowhere have we seen a more pronounced sell the news event in 2010 than what happened to long bonds following Brian Sack's return to POMO markets. Yet while the 10 Year yield is not at either extreme, recently seen just north of 3.3%, the net lifts have bottomed, and the revulsion appears to be complete. Does this mean that with smart money no longer bailing, it has no other choice than to start buying again? And will this lead the actual move in yields lower just like it did 6 months earlier? We will keep readers updated on this very interesting data point which may just be the best leading indicator of what is happening in rates.

And, a curious tangent, the very same Eric Van Nostrand appeared on Bloomberg Surveillance yesterday, with the following circular analysis of why the mere presence of QE2 means that QE2, 3, and infinity are sure to follow.

"The Credit Suisse view is that there would be little point for the Fed to get involved in QE2 if they weren't already committed to QE3, and the reason we say that is that the 600 billion that's planned through June isn't that big when compared to the GDP, when compared to the debt stock.  So if the market starts to expect that the Fed's not going to be buying anymore treasuries after June, then all that's going to lead to is a rush to sell in advance, which is definitely not what the Fed wants."

In other words, should Ron Paul make some -  any - headway in ending the US domination of the currency debasement game, and the marginal benefit of nearly $3 trillion in monetary stimulus (by then) disappears overnight, watch out below. Which is why, as we have repeated many times, any predictions about what happens in 2011 are by and far irrelevant. The only that does matter is what happens i) to the Fed and ii) to future iterations of QE. Everything else is a pure derivative. And to those who naively believe they can predict points i) and ii) above, we have some BBB-rated CMBX 3 we can't wait to offload at par.

h/t Dustin


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Fri, 12/31/2010 - 08:59 | 839252 Gaston
Gaston's picture

Its serious but dont start drinking any kool aid yet. Wear your seatbelt.

Fri, 12/31/2010 - 09:10 | 839262 westboundnup
westboundnup's picture

Stocks (and PM) will continue to rise in the short term, as there's really no other place for capital to go (treasuries? corp. debt?). The inflation tide continues to flood in, but I don't see that as a catalyst for a correction.

Fri, 12/31/2010 - 12:58 | 839273 SheepDog-One
SheepDog-One's picture

Better watch for any ACTUAL money going into stocks at 100 P/E here at nosebleed levels, may as well throw on a prime rib swim suit and jump into the pirahna tank.

Fri, 12/31/2010 - 09:10 | 839264 101 years and c...
101 years and counting's picture

"ii) above, we have some BBB-rated CMBX 3 we can't wait to offload at par. "

Why are you holding such garbage?  I lost all respect for the ZH crew with this admission.....

Fri, 12/31/2010 - 09:20 | 839277 Tyler Durden
Tyler Durden's picture

The January 2, 2012 POMO will be more than happy to pay par plus for it...

Sat, 01/01/2011 - 20:53 | 842029 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

Smart money. Smart mouth. Same place. Same time. +1

Fri, 12/31/2010 - 09:13 | 839267 SheepDog-One
SheepDog-One's picture

Anything other than glass-smooth road surface means total disaster for the Rube Goldbergian nightmare monetizing machine hurtling down the highway devouring $8 billion soft ease back from this folks...any sign that the coals arent being shoveled in full speed and the contraption explodes in spectacular fashion.

Fri, 12/31/2010 - 09:17 | 839275 youngman
youngman's picture

Starting Monday when we sober up..we will be back to the real news and problems..not the fairey tales of the last two weeks...

Fri, 12/31/2010 - 09:47 | 839300 SheepDog-One
SheepDog-One's picture

Certainly a bit of reality would be a welcome change to all of last year Fantasyland markets and world politics. Monday is the day reality makes its grand reappearance? Would be nice, but Im not bankin on it.
I think gas over $4 brings in a lot of reality though and thats coming soon no doubt.

Fri, 12/31/2010 - 09:22 | 839279 SheepDog-One
SheepDog-One's picture

Lets see...'smart money' has been bailing from stocks for 33 weeks, so now their only option is to go back in and buy the top? LOL none of this makes a bit of sense going forward, but good luck to your neck Bernank and Geithner. Youll need lots.

Fri, 12/31/2010 - 09:24 | 839281 primefool
primefool's picture

The one big lesson since 2008 - which has come as a bit of a shock to me - is ... Folks in power can do whatever they want, and if things blw up , they can like Hank, say it would have been worse without their actions. Its like - you come in for an appendectomy , I remove your tonsils - and you say - well trust me you are better off. And guess what -- it works. No public outrage, no legal hassles, no major drama ... just bigger bonuses.

This was an important test of the political system .. and the lessons have been learned - do whatever you want and dont worry - you'll never get called to account.

Fri, 12/31/2010 - 09:41 | 839292 SheepDog-One
SheepDog-One's picture

Always keeping in mind their ultimate end game, getting everything into such debt that it has to be brought back up in a 1 world govt cashless society. Like you say, they can do whatever they want and people say nothing. As long as the Netflix stream, the reality shows, and the welfare checks keep flowing they say nothing, that can all end anytime they feel like it.

Fri, 12/31/2010 - 10:55 | 839381 Cursive
Cursive's picture


Well said.  I'm amazed we've gotten this far down the rabbit hole this fast.  Forget the common man, the inability of the vast majority of "educated" professionals to understand the scope and magnitude of this financial crisis/takeover is demoralizing.  Thank God for ZH and my fellow ZHers.

Fri, 12/31/2010 - 09:29 | 839285 primefool
primefool's picture

Its possible that the average american does not have any say in policies that affect him/her .. because the average american is a debt slave. And slaves have to make that uncomfortable jump - to leave the cozy shed , doing what the master says, dealing with the humiliations - but generally having a prdictable and "comfotable" day to day life. Slaves have to make that uncomfotable leap into the unknown - to escape, to break the "law", to psychologically decide that freedom is better than the false 'comfort". The average american has not yet decided to make this leap. So the game continues.

Fri, 12/31/2010 - 09:51 | 839304 SheepDog-One
SheepDog-One's picture

Good post. +1 POMO.

Fri, 12/31/2010 - 10:01 | 839313 Ricky Bobby
Ricky Bobby's picture


This slave wants to jump. Fear though is powerful force and it takes a brave sould to over come it.

Fri, 12/31/2010 - 09:42 | 839294 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

Can Bill Gross and the Banks make some coin buying UST 10yr again? You bet your bottom dollar.

If the right pieces are in play, you will see it. How do you know the right pieces are in play? Only by seeing it and either frontrunning on what can only be called at present a whim, or jumping on a momentum bandwagon once the trend starts to reestablish itself ...

Hmmm. Sounds a lot like market activity for 2010 ...

Fri, 12/31/2010 - 10:18 | 839328 RobotTrader
RobotTrader's picture

TLT looking very strong pre-market.

Could have a decent tradeable rally in bonds as stocks are way overdue for a correction.

Fri, 12/31/2010 - 10:30 | 839342 Wheatman
Wheatman's picture

Bonds and stocks can fall together, just as they have risen together. Particulary, the bonds of a bankrupt entity (USA).

Fri, 12/31/2010 - 10:26 | 839336 Wheatman
Wheatman's picture

Tyler back to his old bond bull speculation that "smart money" will start buying again. Give it up Tyler. The Fed isn't smart. The morons are inacapable of floating the Titanic, and the USD death means certain death for Treasuries regardless of any "smart" bids for US paper (trash).

Fri, 12/31/2010 - 12:44 | 839620 SheepDog-One
SheepDog-One's picture

The REAL smart money is not going to suicide bonds or the top of the ridiculous stock pump, I believe any actual smart money is going into foreign properties or if theyre staying here, tons of supplies for themselves.

Fri, 12/31/2010 - 10:57 | 839384 Edna R. Rider
Edna R. Rider's picture

I recall writing a comment about how I bought a lot of TLT at 87.67 last year.  I am so cynical about the Fed/Treasury actions that this seemed like a reasonable guess.  I received a bunch of nasty comments, but for one, which told me to keep an eye on it.  I watched it go above 102 (I sold a few dollars early naturally) and sold.  Probably the only time I slept well all year, knowing the government would force this market back up (or down).  Now all these geniuses write about how Treasuries are "suicide" like they did back then.  I always hate to double dip a good trade but it's my thought that TPTB will force this thing back up again.  Thoughts?

Fri, 12/31/2010 - 12:29 | 839582 4shzl
4shzl's picture

You are correct -- "certificates of confiscation, Weimar, etc. etc." . . . sentiment doesn't get any worse than it is right now.  Buy 'em with both hands and enjoy the coupons.  At the end of the day, the coercive capabilities of the Federal government makes it the best risk around.

Fri, 12/31/2010 - 13:49 | 839828 ThirdCoastSurfer
ThirdCoastSurfer's picture

Jeez, any chance the "inflow" is the result of Christmas - Year End bonuses and Year End IRA's?  

Fri, 12/31/2010 - 13:56 | 839838 proLiberty
proLiberty's picture will show relative ratios of stock prices if you put in two symbols separated by a ":".

For basic pointers as to where the "liquidity" is sloshing, I compare:

SPY:GLD     (Trend?  Into equities or into gold)

SPY:DBA    (Into soft commidities or into equities)

SPY:TBT    (Into equities or into short proxy for soverign debt)

And then try all the other combinations of these.  In short order the sloshing trend is more clear.   Of course, I would consider other proxies as well.


For example, shows that the 50 day MA trend is that agricultural commodities are trending more valuable than gold is.

The conclusion I draw about the long term trend of is that both are rising about at the same rate, meaning that something in common to both is boosting the nominal price of both.  That common factor must be air-backed "liquidity" washing down from the helicopter.



Sat, 01/01/2011 - 21:38 | 842079 Guy Fawkes Mulder
Guy Fawkes Mulder's picture

Thanks for posting.

Fri, 12/31/2010 - 14:15 | 839898 flow5
flow5's picture
The 3 month m1 aggregate is growing @ 20.5 SA annual rate percent change, & 13 week m1 is growing @ 15.7 SA annual rate percent change (WSJ Federal Reserve Monetary Data table) SOMA is now UP $96b since the start of the first reinvestment of principal & interest announcement (originally @ 2,054T)

Long-term money flows (aggregate monetary purchasing power), are still declining but by the 2nd qtr, these money flows will suddenly reverse.   Buying the bonds today is a classic game of chicken.  

Fri, 12/31/2010 - 18:37 | 840588 TheProphet
TheProphet's picture

I gotta tell you, seeing fresh inflows would not surprise me in the least. In fact, I sort of expect them to pronounce all is well and suck the individual investor back in before they close the lid and flush the toilet.

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