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Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future

Tyler Durden's picture


The chart below shows the UST yield curve over the past 20 years: as is more than obvious, every single point left of the 10 Year is at record tights. The only question on everyone's lips is where do we go from here. And that is where the confusion really hits.

The confusion is further intensified by the sudden collapse in the 2s10s and the 2s10s30s butterfly. The odd thing here is that a flattening move as violent as recently seen in these two curves, has historically preceded a rise in the Federal Funds rate as can be seen in the chart to the right, before the Fed began tightening in 1999 and in 2004. In other words a flattening has traditionally been a leading indicator to an economic improvement (as liquidity extraction tends to go side by side with a pick up in inflation and thus economic growth). Alas, this time around, a tight monetary policy is the last thing on the Fed's mind, and the economy is only starting to demonstrate it is rolling over into a second and more violent recessionary round. In essence, the Fed's interventionist intention of purchasing the entire curve (including the long-end), as recently announced by the FRBNY, has completely dislocated all leading signaling by the curve itself. As a result, speculation is now rampant as to what may or may not happen. A case in point are the divergent opinions of Bank of America and Morgan Stanley. While the former Merrill Lynch is advocating an outright 10s30s flattener, Morgan Stanley is sticking to its guns and continues to push for a steeper curve: this in spite of the collapse in the 2s10s from a records steepeness of almost 290 bps in May, to under 220 bps as of Friday's close: the over 25% collapse is enough to blow up most of the funds who had positioned themselves for further steepness. At least Morgan Stanley is consistent. Yet both banks urge clients to hedge their trades and provide creative ways to do so, as both realize the likelihood of being wrong, now that the Fed is openly the biggest market participant, is probably higher than the inverse.

Of course, it is now obvious what the Fed wants to achieve, as it gets ever close to using the last available nuclear option: outright monetization of every single asset class. The graphic representation of what Bernanke would like more than anything to be the economic reality is presented on the chart below.

We hope that when looking back in 2012 at this post we are proven wrong, as a completely flat yield curve coupled with an economy that is collapsing ever faster, is the surest way to an outright stock market supernova, that will take obliterate all asset levels in a bout of hyperdeflation (for leveraged items), followed by hyperinflation (for items purchasable by banks with discount window access).

But back to the confusion. First, we present BofA's investment recommendation for 10s30s flattening. To BofA's credit, the recommendation which came out on the 11th before the FRBNY's surprise announcement it would also purchase 30 Years, despite previous indications it would only focus in the 2-10 Year belly of the curve, did anticipate that the Fed would go hog wild in buying the very end of the curve as well.

10s-30s Treasury Curve flattener; long 2m30y Receiver

We recommend two trades to position for an outperformance of the long end of the Treasury curve – 1) 10s-30s curve flattener and 2) long 2m30y ATM receiver

Our main rationale for the outperformance of the long end is an asymmetric response to Fed buying of Treasuries in the 10year+ sector. We believe that the market has significantly underpriced the likelihood of Fed buying of longer dated Treasuries. As Figure 9 highlights, most of the decline in rates has been led by the 10year. Thus we believe that a 10s-30s flattener position offers a 3 to 1 payoff ratio. The market is not looking for the Fed to purchase securities in the 30yr sector, but we think that this is a misinterpretation of the NY Fed operational statement. In 2009, even though the Fed concentrated purchases in the 2-10 year sector, it bought about 15% in the long end.

If the Fed does buy 30s, which occurred in the first week of purchases after the Fed announced the program in March 2009, we believe that the long end will outperform significantly, flattening 10s-30s. If the Fed does not buy the long end in the near term, we believe that the curve will not steepen on disappointment since the curve has not flattened on the back of the announcement yesterday.

We like putting on the trade today right before the Fed is expected to announce the schedule of purchases for the next month. Further, we believe that position unwinds in 10y-30y flatteners have pushed the curve to unprecedented levels (Figure 8).

One risk to an outright 10s30s flattener trade is that the curve may steepen sharply due to any further capitulation of flatteners. Thus, we also suggest a
2m30y receiver position. We expect the 30-year treasury rate to decline in case the Fed announces purchases in the 30y sector, which should also result in the decline of the 30y swap rate. This trade is protected from a further steepening of the curve by the size of the receiver premium.


Flattener: We recommend shorting the 3.125% of 5/19s versus owning the onthe- run 30 year. The 5/19s is cheap to borrow in the repo market and the SOMA holds 7% of this issue. Further the 2018-19 sector is rich on our spline. The on the run 30year is marginally rich on the curve, but we own that sector for liquidity premium and the Fed barely owns this issue in the SOMA. Specifically, we recommend buying $44mn of the on-the run 30 year Treasury and selling $100mn of the 3.125% of the 5/19s at a spread of 144bp

Receiver: We buy $5mn notional of ATM 2m30y receivers at 260bp per notional. The break-even rate for this trade is 14bp below the forward rate.


The biggest risk to this trade is positioning led. Since 10s-30s has been steepening for the last few months, the flattener trade has been crowded. However the aggressive flattening over the last week suggests some capitulation on these positions. Thus positioning might be a little cleaner today.

Yet no investment recommendation on rates can be complete without the opinion of Morgan Stanley: the firm which has been calling for dramatic steepening on the heels of a second American golden age. Over the past year, MS' Jim Caron has expected that courtesy of the Fed's prior actions, the US economy would skyrocket, and the result would be a curve steeper than ever. While Caron was correct through May (for all the wrong reasons as it now turns out; his call for 5.5% in the 10 Year at year end is now dead and buried), the past 4 months have shown just how horribly wrong a thesis that appeared correct on the surface may be, when the actual drivers are completely disproven to have been in any way relevant. Yet despite the increasing bear flattening of the curve, Caron continues to push the steepener trade (presumably not to those who have lost a unlevered 25% from the 2s10s' peak some months ago). And with the Fed now the purchaser of first and last resort of every point in the curve, it is obvious that the flattener is the Fed frontrunning trade. Which in itself is a paradox, as further flatness will increasingly slow down the economy and reduce profit margins for banks and mortgage originators (not to mention once again bring about a spike in NPL levels).

Regardless, for a combination of a weak mea culpa from Caron, together with an intransigent and resolute decision to stick with the "Steepener or Bust" theory, here is Jim Caron's thesis (as well as the natural hedge, in the off chance that just like before, Jim is completely wrong on both the shape of the curve and the shift in the economy), which he now affectionately (and falsely) calls the Fed's "New Regime."

A regime change is underway for the Fed. It is that they are becoming reactive instead of proactive in their use of tools to stimulate the economy. Repeatedly they have mentioned their policies will be data dependent. Supporting this thesis was the announcement from the Fed to purchase USTs. We think it was premature and reactive to weak data from May and June and ignores the strengthening in equities and positive sentiment that goes along with it. The consequence is higher term premiums. Not only do Fed actions ignore the possibility for data to improve in Q3, they also foster a risk of debt monetization. Thus, we argue that although the UST 2s10s curve may flatten, it will remain steeper than ordinary – the steepening of the forward curve supports this view and risk for further record-breaking steepening of the UST 10s30s curve persists.

What's in the price. The market is priced for a slow move to higher Fed Funds rates. Based on the Fed Funds futures market, the Fed is priced to hike only once by the end of 4Q11 to a level of 50bps. Where we differ is that we believe the Fed Funds rate will be at 1.0% at that time (Exhibit 1). This is not in the price. As one can see, a 1.0% call for the Fed Funds rate by the end of 4Q11 is pushing the envelope of a market implied confidence levels as derived by the Fed Funds options market.

Regime change. A key take-away about our rate call, which should not be lost on anyone, is that we expect the yield curve to remain near its cyclically steep levels despite our expectations for the Fed to hike rates in late 4Q11. This is more than just nuance. It is the source of why our forecast for UST 10y yields tends to be higher than consensus (Exhibit 2).

The reason is that we argue that the Fed is taking a reactive stance instead of proactive in terms of inflation risks. The result is that inflation risk premiums, and subsequently term premiums on the yield curve, will be higher going forward. Said differently, the curve is likely to remain stubbornly steeper for longer even in the face of lower inflation. This is the regime change we are referring to.

Record breaking curve steepness. The record breaking steepness of the UST 10s30s curve supports our thesis for a regime change toward steeper curves. Investors have turned toward buying the belly of the UST curve, the 5yr and 10yr sectors, in an attempt to buy yield as they expect the Fed to be on hold for an extended period. This will only be accentuated with the Fed’s recently announced plan to purchase USTs. But there are limits to this strategy and it seems to end at the 10y point on the curve. Beyond the UST 10y point we note that the term premium continues to rise, as measured by the all-time steep levels of the UST 10s30s curve, and the same is true for the UST 5s30s curve. Both curves highlight the relative richness of the belly to the 30y point (Exhibit 3).


But that’s not the whole story. Even the 2-yr forward 2s10s curve forward curve is steepening. It’s near the peak set back in 1992 despite the fact that the spot curve is flattening. Usually major turning points for spot and forward curves are in sync within weeks of each other. However, today the spot curve is out of sync as it peaked 6 months ago while the forward curve keeps steepening (Exhibit 4). This reluctance of the forward curve to flatten supports our view for higher term premiums as Fed policy is more reactive and risks of debt monetization.


Diminishing returns to investing in longer maturities. Investors see diminishing returns to investing in longer maturities because inflation risk premiums are higher. This defines why we think the curve will remain steeper for longer despite the fact that core CPI will likely be lower than average. The irony is inflation risk premiums will be higher despite lower absolute levels of inflation because the Fed is at risk of falling behind the inflation curve. This is the critical linkage we want you to make because it explains why our call for back-end rates tends to be higher than consensus. Simply, it's why our call is differentiated.

While this is all great in theory, those who wish to bet that Caron will be as wrong now as he has been in the past, are advised to read that below section very carefully.

The Risk Case: Slower Growth and a Deflation Scare

The short-term dynamics may trump the long-term. Economic data over the next 4-6 weeks are critical because if they show softening, then it will be unlikely that we get above 3% growth in 3Q, and for that matter in 2H10. 3% 2H10 growth plus 1% inflation is at the core of our assumptions for 10y yields to rise to 3.5% by year-end. If this does not develop, then the risk is we get 2% growth; a threshold for a deflation scare as we see it. This is the risk scenario that could bring the UST 10y down to 2.00% - 2.25% and the UST 2y to 0.25%, flattening the spot UST 2s10s curve substantially.

In other words, everyone has an opinion, but more importantly, everyone is now fully aware that that opinion is very likely patently incorrect, and driven exclusively by one's position as a sell-side pitchman for a bullish economy, which has at its core the requirement to keep the ponzi going and to extract capital from clients on the sidelines, as they shift from realist to kool-aid optimist.

The bottom line is now that the Fed is once again actively involved in controlling the curve, and thus risky assets, the result is utter confusion. If two of the biggest investment banks can not agree on something as simple as the shape of the yield curve, how is it that they or anyone else, can have an informed opinion on where assets that return more than 4% (in 30 years) will head in the future. Essentially, uninformed coin flipping is now the best paid occupation in the world.


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Sun, 08/15/2010 - 15:29 | 522698 VK
VK's picture

Essentially, uninformed coin flipping is now the best paid occupation in the world.

Paid for by the dear taxpayers of course.

Sun, 08/15/2010 - 16:24 | 522773 BlackBeard
BlackBeard's picture

10 bucks says that BOA will be wrong.

Sun, 08/15/2010 - 15:32 | 522699 makeyoumiss
makeyoumiss's picture

Heads, we lose.

Sun, 08/15/2010 - 15:34 | 522701 makeyoumiss
makeyoumiss's picture

Tails, we lose.

Sun, 08/15/2010 - 18:23 | 522936 MichiganMilitiaMan
MichiganMilitiaMan's picture

Correct! Or, we lose our heads and our a*&$s

Mon, 08/16/2010 - 22:26 | 525266 berlinjames02
berlinjames02's picture

Tyler lied. The graph isn't the Treasury yield curve through time- it actually shows the time scale of the Tacoma narrows bridge. Boom, bust, boom, bust... BOOM!

Here's a better visual:

Sun, 08/15/2010 - 15:36 | 522702 tj3
tj3's picture

All that 1st (which I wish had a longer time duration) chart makes me say and feel is;

jesus fuckin christ

Sun, 08/15/2010 - 15:43 | 522716 Chartist
Chartist's picture

I am sticking to my guns:  A ten year note with a 1.5% yield....and SPX 480.  We're not Japan because we have land to develop or farm, commodities to exploit, and an army to waste money on.....

Sun, 08/15/2010 - 15:43 | 522720 redpill
redpill's picture

The Projected Treasury Curve chart looks rather like the ocean receding prior to a tsunami hit.  How appropriate.


Sun, 08/15/2010 - 17:38 | 522868 Hang The Fed
Hang The Fed's picture

+1  LOL, and when that wave finally comes roaring in and breaks on the shore, just imagine how many of us will swept away with it?  Now is probably a good time to stock up on candles, canned food, and guns.  I hear that, in spite of the grunting, farting death of the RE market as a whole, there's been a recent uptick in interest in cave-dwellings, since the Fed is essentially looking to leave us all completely bereft of the ability to feed/clothe/house ourselves.

It'll probably be just after the Fed finishes the task of destroying the markets and any sense of personal wealth (except, of course, for themselves and their butt-buddies at the banks) that we will see the introduction of a massive govt. program to provide all of your basic necessities, as long as you're willing to subject yourself to some series of embarrassing, obscene, dehumanizing procedures.

"Give me control of a nation's money supply, and I care not who makes its laws." - Mayer Amschel Rothschild

Mon, 08/16/2010 - 01:53 | 523468 jeff montanye
jeff montanye's picture

the fourth mad max film is set to begin filming (charlize theron and tom hardy to star).

Sun, 08/15/2010 - 15:45 | 522724 ZeroPower
ZeroPower's picture

Great post. Shorting these will still be the trade of the century, just have to be patient..

For the FI people, how d'you reckon you'll know to put the trade on? Looking for a certain limit to be breached or there'll just be a sudden pop one day?

Sun, 08/15/2010 - 16:30 | 522788 hellboy
hellboy's picture

Listening to you guys on here and people like N.N.Taleb, doing my own research and tinkering about this it all sounds to easy to be true... nevertheless I would like to ask anyone how to trade this as a private human being with a normal spreadbetting/options account... What would you guys buy to short these longer term?

Sun, 08/15/2010 - 17:00 | 522830 Yorick7
Yorick7's picture

Do your choice of spread in futures, but you need to get the amounts right and deep pockets for the margin, although if your broker uses SPAN they will offset a little.  Be careful, a lot of big guys are getting run over by this trade at the moment and thats why it's at such an exteme level, the timing will be difficult to call.

Sun, 08/15/2010 - 18:38 | 522951 ZeroPower
ZeroPower's picture

Indeed, this question has been brought up a lot and tons and most of the time i see posts referring back to the ETFs like TBT TBF etc. Basically, without going synthetic, there is no quick and simple '$5000 in my e-trade account' way. To legit short bonds you need deep pockets. For retail, futures offer the easiest access.

Also, maybe even more simply, you can invest in the RYJUX (Rydex Inverse Gov Long Bond Strategy Inv) but the downside is youre still trying to pick the top/bottom..

As the poster above said however, getting a futures account and trading the /ZN ZF and ZB would do pretty well. Theres no accrued interest to be paid (normally you would pay the coupon) and the margin is ~10% of the market value. Also, a pair trade would work well here if you prefer to hedge by being long some decent munis while shorting the gov bonds.

Finally, you could always buy some TIPS if youre betting on inflation.

Sun, 08/15/2010 - 18:41 | 522954 hellboy
hellboy's picture

Cheers for the heads up guys/girls!

Sun, 08/15/2010 - 19:44 | 523016 hack3434
hack3434's picture

If the treasury market collapsed, why would the dollar hold up in value? wouldn't the lack of confidence and capital outflows make the dollar crash right along with treasuries? 

Sun, 08/15/2010 - 22:05 | 523234 New_Meat
New_Meat's picture

we're bad, but we suck worse than the others. dang - Ned

Mon, 08/16/2010 - 13:41 | 524185 DavidC
DavidC's picture

Don't forget that the currencies are all relative to one another, there's no 'absolute' (even if the dollar is still regarded as the de facto reserve currency).

If rates go up the dollar could rise if the interest rate differential goes up compared to other countries.

The race to the bottom!


Sun, 08/15/2010 - 23:52 | 523385 Dingleberry Jones
Dingleberry Jones's picture

Great info. Thanks for shedding some light on this for those of us who aren't traders.

Sun, 08/15/2010 - 20:40 | 523085 jm
jm's picture


The shape of the yield curve is a parameterization of the inflation-deflation issue.  Thankfully at the core of this variation is observed data which avoids all the doctrines and bullshit theory that has become just one-note annoyance by zealots anymore.  The yield curve is also practical venue for consideration, because it limits the discussion to investing.  There is no place for mad max when talking about curve steepening or inversion.  It is bounded by the assumption that things will not fall apart, and the center will hold.  This assumption is not heroic.  History shows that societies take more stress than the great depression, total plague, even civil war to utterly collapse.  There is no point in investing if you believe otherwise: you are reduced to preparation for cave-life and canned rations.   

Even within the confines of these assumptions, everyone can be wrong and being strongly wedded to a world-view can make you blind to the real world as it changes. What I fear most is confirmation bias: thinking that you are right so strongly you can't see a 2x4 coming for your face.  Sometimes you are wedded to a position because the size of trade makes it difficult to liquidate.   

I've thought about Taleb and his short treasury stuff.  It's not non-sense, nor is it asinine as I have said before. I'm pretty sure it is not a "cash" short he's talking about.  He is probably talking about a tailored options position that manages the greeks.  There is a world of difference in this and it makes me wonder if he is just cultivating a “persona”.  No offense meant in that...he is literary minded.

I myself have a pretty decided view in bull flattening; given that 10s30s is at all-time freaking highs and news-flow is terrible, I think the risk reward on the 10s30s flattener discussed in the article is favorable.  But I think the most serious risk is the bull butterfly.  A bull butterfly uses swaptions to buy receiver on the short end of the curve, sell receiver on the body, and buy receiver on the long end of the curve.  If my Sherlock Holmes impressions are right, this position will be destroyed.

First, the Fed has no desire or intention to see money market mutual funds die, but ZIRP is going to cause it.  Shadow banking needs cheap short-term funding, but returns are so low that the the market is dying.  No one rational will accept an effectively negative return when inflation is 1% and rates are 0.1% when without a meltdown situation.  Simply stated short-term rates are going to have to rise barring another meltdown scenario.

Second, as the economy deteriorates, there is an organic case for longer duration, which we are seeing.  This feeds into those steepeners closing out, which makes the bull flattener case independent of news-flow and fundamentals… rather self-fulfilling. 

This thinking, if correct, implies a compression of the yield curve much more like a flatline, meaning yields across the curve are much more the same whatever the duration.  Precisely where on the body yields will converge is an open question: 5s (concensus view), 7s, 10s (extreme case)?  No one knows. 5s has had a great year, but I think moving out in term ahead of concensus will make money.

Taleb IS right about prediction failure.  Only a fool thinks he can know the future with equal precision two years, ten years, and thirty years out.  So taking a view on 2s30s is a serious thing.

If expectations continue the risk on and risk off mentality in an extreme way, expect volatility.  A straddle built with CME contracts (ZB or the ultra) or even options on TLT can be cheap hedge/sweetener on a long or short cash position in treasuries.  More aggressively, it could become a trade. This can be is tailored to take a very precise view, and you can do the same with the term structure of volatility.

Again, this very reasonably assumes that things will not fall apart and the center will hold.   


Mon, 08/16/2010 - 08:36 | 523589 chinaguy
chinaguy's picture

Thanks for this nice analysis in an (otherwise) sea of fluff

Mon, 08/16/2010 - 08:47 | 523597 jm
jm's picture

Breakout in the long bond this morning.


Mon, 08/16/2010 - 12:03 | 523900 4shzl
4shzl's picture

Outstanding comment.  Taleb "cultivating a persona" -- LOL.  How about another academic who's been seduced by the MSM into believing he's celebrity?   Face time on the tube = book sales; ergo, no prediction is too extreme if it provokes a call from Bloomberg or CNBC.

Mon, 08/16/2010 - 13:21 | 524126 SWRichmond
SWRichmond's picture

The shape of the yield curve is a parameterization of the inflation-deflation issue. 

Not trying to be a smartass, but I never got past this sentence.  The shape of the yield curve, like every other once-valuable significant market parameter, is firmly in the hands of the central bank and therefore doesn't mean anything anymore.  Read it as a meaningful indicator of market conditions if you wish to, I will choose not to.  Chartology = meaningless, interest rates = meaningless, CPI statistics = meaningless; it's called "painting the tape", and if you had unlimited resources, total regulatory forgiveness and the blessing of elected officialdom, you could do it, too.  I am not asserting they will get away with it long term, so don't throw that canard at me.

Sun, 08/15/2010 - 15:51 | 522730 Segestan
Segestan's picture

Well thats what they get for incorporating the World in their yield curve. A chart that starts 20 years ago and doesn't refect national bankruptchy can't be very reliable.

Sun, 08/15/2010 - 15:56 | 522736 johngaltfla
johngaltfla's picture

The only certainty I take from all this is that we will not see a 2 year yield above 1% until long after 2012. At some point, if the 2 goes to 0.25 to 0.40% yield people are going to recognize that the Fed is going to do all that it takes to "manage" or control the bond markets, free market principles be damned.

At some point, when the JGB is a larger portion of the ChiCom portfolio along with their issues gaining more traction worldwide, the world will not need the Toilet Paper we are putting out on the markets.

THAT is when our lives get seriously interesting (as if they are not now).

Sun, 08/15/2010 - 22:09 | 523248 New_Meat
New_Meat's picture

Who is?

"THAT is when our lives get seriously interesting (as if they are not now)."

I'd say, not that interesting, yet.  Takes time in a "long dead time process".  The feedback ain't there.

So not for years, but yes, as the Brits say "on the way."

- Ned

Sun, 08/15/2010 - 16:00 | 522743 rubearish10
rubearish10's picture

Well, with deficit spending still on the loose and low to no growth in front of us, I think we'll have a Bond Vigilante raid "before" we see yields drop much further. This does not exempt the S&P from reaching 600 and DJIA5000. In other words, the deficit issue will supercede extreme rate deflation and we'll get our equity crash (but probably in "slo mo").

Sun, 08/15/2010 - 16:06 | 522751 FranSix
FranSix's picture

Hyperinflation would certainly make up for the inflation adjusted losses since 2000 in terms of share prices and become a bull market for stocks, but not really result in any gains because the value of your asset is priced in currency.

We are no longer in the boom of the bull market for stocks since 1982 - 2000.  That's gone.  Its over.

To calculate how much you would need to make in gains on an inflation-adjusted basis since 2000, you just use an inflation - calculator and use the 'shadow stats' option:


Sun, 08/15/2010 - 16:15 | 522760 iPood
iPood's picture

The implicit consensus in both positions is that the Fed will have the luxury of keeping rates close to zero at the short end of the curve, which will migrate to the longest end (decreasing rates there) in the view of BoA and will evoke an inflation premium (increasing rates at the long end) in the view of MS.

Perhaps the "zero rate consensus" is what should be questioned. After all, look at what's happened to bill rates in some of the profligate EU nations over the past few weeks. Even Ireland, who was reportedly trying to behave, suffered a significant short-end spike last week. Solution - short the 03/11 (or more distant), 3-month ED or sell calls thereon? Just a thought...

Sun, 08/15/2010 - 16:16 | 522763 TooBearish
TooBearish's picture

The Fed's tiptoeing into monetization with QE 1.9 announced last week.  The banks and Pimco will frontrun the shite out of Ben and drive Treasury yields to their 08 lows or lower.  Look what the FED did to the mortgage market- shite it is totally disfunctional.  SPX 1200! All assets rally after the fall puke as the USD is obiterated!

With no more capacity for fiscal bailouts Ben wants mortgage rates to plumment to forestall the next wave of RE defaults, it will be the mortgage refi opportunity of a lifetime.

Obama and his hinchmen coup the fall elections from the dazed and confused Republicrats.

October surprise anyone?

Sun, 08/15/2010 - 16:24 | 522774 merehuman
merehuman's picture

after all my reading on ZH i came to the conclusion that it is stupid to actually work anymore. Pointless. Stealing is the new wave as the market and government set such a great example.

Since stealing goes against the grain(my personal issue) i am out of the workplace all together.

Thank god i done need money.Selling the truck so as i dont have ins.payments, tags lic etc. Plus i am doing all i can to have 0 (zero) connection to the dishonesty that now prevails. I personally would rather starve than take one penny of gov. largesse.

All those of you who still conduct business with the criminal market ought to be ashamed. Profit over morality and principles rules the fools

Sun, 08/15/2010 - 16:27 | 522779 BlackBeard
BlackBeard's picture

Would a some skittles cheer you up?

Sun, 08/15/2010 - 18:18 | 522929 Hansel
Hansel's picture

I feel the same way merehuman.  Having a job makes me feel like a slave to the gov't, required to pay the vig for them to squander away.  This sucks.

Wed, 08/18/2010 - 16:11 | 528915 NotApplicable
NotApplicable's picture

Ashamed? Who was it that said, "If the people demand democracy, then they deserve to get it, good and hard!"?

I just consider it a form of tough love. Don't hate the player, hate the game, etc...

Sun, 08/15/2010 - 16:25 | 522776 DarkMath
DarkMath's picture

The Treasury Yield Curve will flatten until it flat lines.

Mon, 08/16/2010 - 00:23 | 523418 StychoKiller
StychoKiller's picture

Once that happens, I believe the Fed will crank up the gain beyond "11", hoping to get some sort of signal back into the market -- as any Electronic Engineer can tell you, even a small step impulse fed into such a system will respond with either a ringing, underdamped response or outright oscillation, which can blow out your speakers (or whatever the oscillating output is connected to) -- fuses will pop, and the output signal will flatline at either the positive (hyperinflation) or negative (deflation) power supply rail.  Better to keep the Govt and the Fed from meddling in what they do NOT understand -- but we KNOW they just can't help themselves from doing so!

Sun, 08/15/2010 - 16:29 | 522784 TraderTimm
TraderTimm's picture

Tyler, that is a beautiful graph of the curve. Looks like a roiling ocean wave. Superb data visualization.

I bet the people on the wrong side of the trade had an equity curve like this:

Time to check the parachute, tighten the lines and prep yourself for some zero-g.



Sun, 08/15/2010 - 16:37 | 522797 hellboy
hellboy's picture

interesting video :)

Sun, 08/15/2010 - 22:00 | 523209 FranSix
FranSix's picture

The chart clearly demonstrates that the discount rate was higher than the long term rate for a period leading up to the Nasdaq crash,(called an inverted yield curve) and once again prior to February, 2007, where the BKX peaked out. (along with a great number of stocks) Lehman went under that year.

What followed was the crash in 2008, and the rebound.

Lower rates across the yield curve is forecast.

Mon, 08/16/2010 - 00:28 | 523425 StychoKiller
StychoKiller's picture

From what I understand of the way the bond market works, this wave is not going to smash anything, rather, it's gonna suck the life (FRNs?) out of the market.

Sun, 08/15/2010 - 16:31 | 522790 agrotera
agrotera's picture

Jim Caron will be right EVENTUALLY, but not until everyone following his lead gets slaughtered and says "uncle"--

Sun, 08/15/2010 - 16:32 | 522791 RoRoTrader
RoRoTrader's picture

Debt monetization - paying of bills by printing new currency. Gov'ts must instead pay with currency already in circulation, or else finance deficits by issuing new bonds, and selling them to the public or to their central bank so as to acquire the necessary money - Wikipedia



Sun, 08/15/2010 - 16:40 | 522799 masterinchancery
masterinchancery's picture

which govts?Not ours.

Sun, 08/15/2010 - 21:07 | 523127 RoRoTrader
RoRoTrader's picture

Certainly, lend a dollar and the promise is to repay........80 Cents, but we'll call it a dollar.

Sun, 08/15/2010 - 16:49 | 522814 TonyForesta
TonyForesta's picture

The predatorclass destroyed America.  I'm long on gold (bullion, not paper or companies) guns, ammo, water, and canned food products.  Oh... and "Put your trays in the upright and fixed position, we're about to enter some turbulence!"

Sun, 08/15/2010 - 19:22 | 522999 ZeroPower
ZeroPower's picture

Ah yes, the good old guns and ammo post. Was waiting for it to show up here, thanks.

Sun, 08/15/2010 - 22:02 | 523226 mauistroker
mauistroker's picture

That's good an' all....I'd add things like a piece of workable land, lots of tools, practical skills, fruit trees, nitrogen fixers, cover crops/green manures, a rain harvesting system, grey water distribution, year round mild climate, friends & neighbors with "mad skillz" and hobbies/interests that you can do cheaply and locally.

Excellent and important piece TD. Thanks. Especially love the 'stock market supervova' and 'hyperdeflation' concepts.

For the other posters struggling with staying in the market....I took my capital out of play entirely and it feels great now - definite withdrawal symptoms at first but had to do it. The entire 'market' is sick joke. None of our historically useful tools, techniques & benchmarks have efficacy any longer - that's what happens when TBTF institutions are 'saved' and cronyism is crass and rife. In the money business NOTHING can be trusted anymore.


Sun, 08/15/2010 - 17:01 | 522833 SWRichmond
SWRichmond's picture

Fed's interventionist intention of purchasing the entire curve (including the long-end), as recently announced by the FRBNY, has completely dislocated all leading signaling by the curve itself

The government's intervention in every other asset class has done the same thing: clearly communicated their panic.  The Fed has been astride the entire financial system for the past two and a half years.  The next idiot who confronts me with talk of an "exit strategy" is going to get puked upon.  There is no exit strategy, never has been an exit strategy.  Talk of an exit strategy is a strategy in itself, and talk is all it is.  They talk about it, for months, then the next actual action taken is more support.  The entire goddamned financial system is on life support based on lies; I'm fighting the urge to completely cash out.  Why am I fighting it?  Some foolish hope?  Capital in these markets isn't safe.

Sun, 08/15/2010 - 17:44 | 522891 kaiserhoff
kaiserhoff's picture

I second that emotion.  Ben continues to believe that it's bankers uber alles, but the banks have never been less relevant.  Playing silly games with blown out debt has nothing to do with actual asset values.  Even a worm learns.

Japan has made the same mistakes for 21 years, and as Farber points out, Tokyo is still the world's most expensive city.  How's that hopium working for ya?


Sun, 08/15/2010 - 17:55 | 522902 agrotera
agrotera's picture

Bravo SWRichmond--

I feel exactly the same way--the whole discussion of exit strategy between people who are capable of knowing the facts is, well, worthy of their getting powerfully (projectile vomit) puked upon! 

Unfortunately, it looks like truth doesn't matter anymore as far as our government shills and their bosses, the owners of the privately held federal reserve are concerned.

Mon, 08/16/2010 - 00:33 | 523431 StychoKiller
StychoKiller's picture

The Fed reminds me of the elder Chinese guy in "The Sand Pebbles" (with Steve McQueen), that gets down in a crankshaft pit to try and dislodge a large bolt, the piston fires once more and the guy gets pretty much smashed by the crankshaft when the piston drives in one more rotation -- sometimes, you just gotta stay out of the way!

Sun, 08/15/2010 - 17:06 | 522836 wang
wang's picture

I missed this mention of ZH via Drudge via Cramer's The Street but The Street did not have the courtesy of placing a link to ZH - why would anyone even visit that pathetic site?


For what it's worth here's the link - still on the left column of Drudge (likely commented on by someone else earlier so forgive me for repeating) (too bad Drudge didn't link to ZH directly)

Sun, 08/15/2010 - 19:55 | 523023 zaknick
zaknick's picture

"The blog Zero Hedge, writing in a vein that seems made for professional boxing or WWE pay-per-view event hype, describes the Hindenburg Omen..."



Sun, 08/15/2010 - 17:32 | 522865 M.B. Drapier
M.B. Drapier's picture

Wm. Buiter's recent bit about the chicken match between central banks and governments appears relevant here. (Shorter version.) It seems the Fed is about to lose badly while the ECB is still mostly holding the white line.

Mon, 08/16/2010 - 05:10 | 523507 Escapeclaws
Escapeclaws's picture


Thanks for the great article by Buiter, MBDrapier. Fascinating read and a real eye-opener. Not being an economist, there were some obscure parts for me, but I made the assumption that one could trust his mathematics, and his sensitivity analysis on alpha in his currency equation shows that his model is robust. 

This is an article that everyone should read because it shows that Central Banks such as the Fed and the ECB have around 30 times the equity that they show on their official balance sheets. This goes to the trillions of dollars. This money ultimately goes to the real owners of the Central banks, the European people in the case of the ECB and the Rothchild's et al in the case of the Fed.

Consider Ireland, which has shifted the entire onus of the Banksters' theft of their national wealth to the taxpayer for one or more generations in their so-called "austerity" program. This article indirectly shows what a crock austerity is! The ECB could easily subsidize most of the increased taxes and decreased allotments on and for the Irish people. A combination of clawbacks and fines, plus ECB subsidy would be sufficient to take this burden off the backs of the innocent parties currently being pillaged. Europeans should be out in the streets demanding that the the ECB step up and make good the banksters' depredations. 

In effect few people, even at ZH, are going to see the glaringly obvious need to capture these trillions of dollars in central bank funds, rather than impose austerity on taxpaying populations. There are too many equations (even one equation is too many for all but economics PhD's) and the article is written on too high a level to be absorbed by any but its intended audience. 

(Given these ECB assets and the fact that the even now the French and German economies are showing fundamental strength, I find it hard to see why the Euro should not in fact be increasing in value against the dollar at this very moment. Propaganda seems to rule the day in currency movements.)

Unfortunately, this article cannot be reduced to a CNBC soundbite, so nothing will come of it in terms of helping ordinary people. 

Edit: I just realized ZH published this article right ahead of the article containing this comment. Oh well, perhaps this comment will induce others to read the Buiter article, which has 1/10 the number of comments of the current article! Sexy graphs do make a difference, as shown consistently by Robotrader.

Wed, 08/18/2010 - 17:52 | 529135 M.B. Drapier
M.B. Drapier's picture

The problem is, though, that this money isn't really an asset the CBs are sitting on, it's a /de facto/ taxing power. So it can't really ease the taxation/borrowing/spending/bailout trade-offs, it can just take part of the decision out of proper democratic control and scrutiny. (And naturally that's even if we assume that Buiter is right about how much can be raised before inflation becomes a problem.) So (for example) in so far as the ECB is funding the "core" Irish budget deficit, it's taxing the whole Eurozone in order to pay for benefits, public service pay etc. in Ireland. Not only is this somewhat unfair on the Germans and others, it's not something the ECB has any democratic mandate to do: in fact the Eurosystem is specifically banned from doing it (under Article 123 of TFEU). Meanwhile the ECB's support of the Irish government's bank bailouts is a complete hairball, since the bailouts benefit banks in Germany, France and so on.

This money ultimately goes to the real owners of the Central banks, the European people in the case of the ECB and the Rothchild's et al in the case of the Fed.

I believe the Fed normally hands its profits over to Treasury?

I just realized ZH published this article right ahead of the article containing this comment

I think my comment preceded the ZH article, not that it's very important.

Sun, 08/15/2010 - 17:32 | 522870 Hammurabi
Hammurabi's picture

Thank you TD, very rational, nice

Sun, 08/15/2010 - 18:17 | 522921 metastar
metastar's picture

Through everything, I keep asking myself how do the largest banks which make up the private Federal Reserve profit from all this? More specifically, how do the biggest shareholders benefit?

Assuming TBTF bank profits are the motive, I am trying to determine what the Fed (and their little brother the US government) might do next. It would be interesting to see more analysis done within this framework.

Any ideas???

Sun, 08/15/2010 - 18:32 | 522945 Dr. Sandi
Dr. Sandi's picture

Through everything, I keep asking myself how do the largest banks which make up the private Federal Reserve profit from all this? More specifically, how do the biggest shareholders benefit?

Assuming TBTF bank profits are the motive, I am trying to determine what the Fed (and their little brother the US government) might do next. It would be interesting to see more analysis done within this framework.

Any ideas???

My assumption is that the banksters will sell a couple trillion more treasuries that have never actually been issued, while the gov provides them cover. Why would they do anything different from that which has been so very profitable for the past decade or two?

Sun, 08/15/2010 - 18:18 | 522930 JLee2027
JLee2027's picture

Beautiful crumple graph.

Sun, 08/15/2010 - 18:34 | 522949 FASB 666
FASB 666's picture

Graph reminds me of "TimeWave Zero", prepare for maximum novelty !

Sun, 08/15/2010 - 18:51 | 522965 carbonmutant
carbonmutant's picture

I love Info Porn...

Sun, 08/15/2010 - 19:18 | 522994 Bear
Bear's picture

Toilet paper coming off the roll ... Just wait for it to be used for its intended purpose. Just visualize where it goes from here.

Sun, 08/15/2010 - 19:46 | 523017 Bear
Bear's picture

"The graphic representation of what Bernanke would like more than anything to be the economic reality is presented on the chart below."

I love it ... what is the UST price when the 30s go to zero?

Sun, 08/15/2010 - 19:49 | 523019 JR
JR's picture

I think we’re at the end of the period where Bernanke has an arbitrary choice of taking value from the economy and giving it to his employers--the owners of the privately held federal reserve.  I think the pressure that comes from the Asian economies and the health of the Eurozone is going to play Bernanke’s cards for him.

Bernanke has forced America's debt-to-GDP ratio into the danger zone; whether or not he’s able to coast along at zero will be determined by other economies being cooperative.  He’s used up the breathing room in America's economy.  He’s created private sector imbalances that endanger the status of the reserve currency and the political leverage of American economic policy in the world.  IOW, when Geithner goes to visit his pals in Asia he can no longer tell them, Do this and do that; he’s no longer backed by a healthy relationship. They’ll just say: Geithner, siddown! You’re on the edge over there. 

The banksters--the Rubins, Greenspans, Bernankes, Paulsons and Geithners--have destroyed a healthy economy by taking the value from the producers and giving it to the crooks and the nonproductive.  They’ve taken the money and given it to investment bankers to gamble on risky investments. And when someone says Bernanke is “out of tools,” what he really means is Bernanke had some blanks and he’s fired those and now he’s sitting there with a firing pistol and no blanks.  (He never did have real bullets.)

The whole procedure is anti-free enterprise. Bernanke’s gotten everybody scared to death.  No wonder BofA and Morgan Stanley can’t tell which way is up. 

Welcome to the rest of us.

Sun, 08/15/2010 - 20:36 | 523080 Reese Bobby
Reese Bobby's picture

Well put.  Rubin and Paulson have jumped ship: e.g. Rubin now harping about the danger of deficits!  Greenspan has gone shit-house-rat-crazy.  Benniemae and little timmy are stuck.  Once the current ZIRP/QE financial asset bubble pops it is game over; non solution.  The one piece I can't figure out is what are the evil-but-smart Chinese leaders thinking. How do they protect their $US holdings?  It seems they are counting on deflation? Or stuck I guess...

Mon, 08/16/2010 - 04:49 | 523511 Escapeclaws
Escapeclaws's picture

"Rubin now harping about the danger of deficits!"  This is not jumping ship. Rubin wants higher taxes and cutbacks in social programs to pay down the deficits, rather than clawback the banksters' wholesale theft and impoverishment of the middle-class, which is gradually but intentionally being strangled to death. This de facto austerity proffered by the likes of Rubin and other deficit hawks is part II of the greatest theft in history.

Mon, 08/16/2010 - 00:11 | 523407 surfsup
surfsup's picture

"The whole procedure is anti-free enterprise."


Don't mean to oversimplify here but interest based debt systems always do eat their own tail as in truth the ability to "publish" wealth is not conducive to "free enterprise."   Its a jolly work of artifice from stem to stern and reality always prevails as those who "publish," transfer "from" the producers to the point of blowing out the system.   I look at TD's chart and all I see is a bright stall warning indicator flashing -- at some point no matter how large the wings are the sheer loss of forward momentum creates a stall.  Also, real wealth is in the ability of people to cooperatively interact for the better of the whole.  Representational value is really only as good as the representational system supports accurate and balanced flow among the parts of the whole.   No matter how many tokens or even gold one has if the interchange of effort among people is crushed the value for everything for everyone goes down, period.  This is all just a portion of theater toward the "grand reset" where usury will be puked upon the planet again as an attempt to "fix" what "some people" caused, yet an "actual"  fix would and could only come from a balance in exchange -- not a continuation of "me first - you last" child's play.  We are literally staring into the abyss caused by a bunch of out of touch children -- with their "me first"  "Ten for me -- one for you" old paradigm mindset.   50 years from now our time will surely be considered another "dark age" where selfish spoiled children ran rampant over the incredible potential of human cooperation and innovation.   The loneliest people are those who bend equal and honest exchange and in so doing where they succeed on one level they fail miserably on another -- no way around that.   Our great great grandparents handed us this old beat tractor anyway -- we can do so much better...

Mon, 08/16/2010 - 00:41 | 523437 StychoKiller
StychoKiller's picture

The Fed is busy pushing the throttles for ALL engines to full, while the Govt remains busy re-arranging the load of anvils (govt programs) in the cargo area, causing the CG (Center of Gravity) of the plane to gyrate back and forth -- none of this will end well.

Mon, 08/16/2010 - 11:59 | 523888 JR
JR's picture

No matter how much artificial thrust that Bernanke provides for the economy’s engines, there is not enough wing area to prevent the stall warning light.  Great symbolism!

As for this “child’s play… with their ‘me first’  ‘Ten for me -- one for you’ old paradigm mindset…” Collis P. Huntington put it like this:

Whatever is not nailed down is mine.  Whatever I can pry loose is not nailed down.

Thanks for the clear logic, surfsup.  It was brilliant!

Mon, 08/16/2010 - 00:31 | 523429 tom a taxpayer
tom a taxpayer's picture

Well-said, JR. You summed up the entire corrupt, lawless, stinking pile of Wall Street/government garbage.

"The banksters--the Rubins, Greenspans, Bernankes, Paulsons and Geithners--have destroyed a healthy economy by taking the value from the producers and giving it to the crooks and the nonproductive."

Sun, 08/15/2010 - 20:32 | 523076 Catullus
Catullus's picture

Daneric's got a couple of points made on this as well.  Not as cool as the 3-D curve graph, but important to consider.  If the 10s and 30s don't break the 2008 highs, they will break channel down and pull up the short end of the curve.  The deflationary collapse will come in the face of rising interest rates to which the Fed will begin buying everything it can to prevent.  The question becomes what happens in the derivatives market if the initial increase in interest rates and subsequent defaults happens first?

Sun, 08/15/2010 - 21:28 | 523137 TumblingDice
TumblingDice's picture

Geithner is trying to kill two birds with one stone. Allow an economic scare heading into the midterms and at the same time depress the yield curve enough to be able to increase average duration. The strategy may backfire, though. In 2008 the economic panic made people go for BO, but this time it may go the other way.

Regardless of the political consequences, look for the Treasury to start issuing more 10s and 30s. The increased supply should bring back curve steepness and increase average duration. When we reach that magic 72 week avg duration Timmy says he is targetting, then I would reevaluate.

Sun, 08/15/2010 - 22:18 | 523270 Mitchman
Mitchman's picture

The last thing that BO and the Democrats need is any kind of economic scare.  They're the guys with their hands at the controls and it's their Summer of Recovery.  Anything gets any worse in a major way at this point in time is getting laid at their doorstep.

Sun, 08/15/2010 - 21:47 | 523199 anarkst
anarkst's picture

Face it, nobody knows what's going to happen.  It makes life worth living!

Sun, 08/15/2010 - 21:59 | 523216 redpill
redpill's picture

Unexpected summer rain storms, an early snow, or a surprise party; these are the sort of unknowns that make life worth living.  Trying to predict how and when the central banking train runs out of track?  Not so much.

Sun, 08/15/2010 - 22:13 | 523258 Mitchman
Mitchman's picture


Sun, 08/15/2010 - 22:24 | 523276 Bear
Bear's picture

Why is this junk? It appears to be profound to me. Tell me who knows what will happen tomorrow? If we junk the 'profound' will junking even mean anything anymore?

Sun, 08/15/2010 - 23:00 | 523339 nonclaim
nonclaim's picture

Some people have full control of their lives and anything that shines through a crack on that illusion is not worth their time.

Mon, 08/16/2010 - 00:00 | 523402 Bear
Bear's picture

I live in the cracks, so anything that slips through is good news for me.

Sun, 08/15/2010 - 22:01 | 523223 lizzy36
lizzy36's picture

I love graph porn. 

Great post.

Thank you.

Sun, 08/15/2010 - 22:48 | 523322 saulysw
saulysw's picture

Like a paper roll fluttering in the wind. The ZIRP floor is "sticky", and I believe the curve is likely to follow the projections given in the third graph, give or take a few wrinkles.

Sun, 08/15/2010 - 23:52 | 523391 Miles Kendig
Miles Kendig's picture

Ya, and Bernanke never slices....

Mon, 08/16/2010 - 01:17 | 523454 Mark Beck
Mark Beck's picture

How do we reconcile the large monetization of Treasury debt and low yields? The extreme case being complete collapse in outside buyers. This is the failure of sovereign debt based on the concept of a bond. 

To me a bond, conceptually, is a way to generate capital to satisfy some immediate need for investment in order to increase growth, and through this growth, retire the debt. The question of a bond in perpetuity, as in large US sovereign debt, is not a viable solution when there is no evidence of the debtors ability to generate growth, and through this growth, retire the bond (debt).

To the US sovereign debt bond holder, there is no fundemental difference between a sovereign default and reduction of Bond face value (real worth) denominated USD through monetary inflation. Only the time line is different. The bond investment only makes sense for an entity that can retire the debt without debasing its value.

In totality, if you debase your own currency in real time, the yeild is what you make it. The bond is no longer a bond, the bond is just an accounting feed through for debased dollars.


You can see the absurdity of the Sovereign debt market for countries that cannot effectively leverage their bond issuance. For these countries, there is no reason to invest outside a maturity window which represents long term real negative growth. Which for the US is perahaps 6 months away.

Why is US sovereign debt such a warm cuddly security blanket? As we have seen in this article, its market dynamics are breaking down.


So is this so hard to understand. The vehicle is dislocated from the market it is meant to serve. It no longer can support the burdens of the US Government.

Treasuries are now, as they have been in the past, the instrument of fiat debasement.

This is what we see.

Mark Beck

Mon, 08/16/2010 - 02:45 | 523467 iPood
iPood's picture

Will unexpectedly poor TIC data on 08/16/10  pop the bond bubble and Hindenblimp?

Mon, 08/16/2010 - 07:18 | 523549 pauldia
pauldia's picture
Tons of gold imports in UAE turn out to be fake


Mon, 08/16/2010 - 10:43 | 523726 Zero Debt
Zero Debt's picture

Top-class surface charts, very enlightening, thanks for posting this.


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