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

Tyler Durden's picture

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VK's picture

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

Paid for by the dear taxpayers of course.

BlackBeard's picture

10 bucks says that BOA will be wrong.

MichiganMilitiaMan's picture

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

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:

tj3's picture

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

jesus fuckin christ

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.....

redpill's picture

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


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

jeff montanye's picture

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

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?

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?

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.

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.

hellboy's picture

Cheers for the heads up guys/girls!

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? 

New_Meat's picture

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

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!


Dingleberry Jones's picture

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

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.   


chinaguy's picture

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

jm's picture

Breakout in the long bond this morning.


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.

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.

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.

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).

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

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").

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:


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...

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?

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

BlackBeard's picture

Would a some skittles cheer you up?

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.

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...

DarkMath's picture

The Treasury Yield Curve will flatten until it flat lines.

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!

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.



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.

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.

agrotera's picture

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

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



RoRoTrader's picture

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

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!"

ZeroPower's picture

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

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.


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.