10 Year Treasury

what does it mean?

Is the low implied volatility a harbinger of good things to come, or just one final act in luring the sheep to the yield chasing slaughter...

Europe has already entered a Japanese sort of existence and America will be coming next in our opinion. We are caught in a trap of our own making and this will be the price for the printing of all of this money. As China has reached its apex and begun a gradual grinding down in their economy, as Japan wrestles with insolvency, as Europe falls further into its sinkhole; America will follow.  Make hay while you can but you may also wish to notice that the fields are shrinking and that less hay may be forthcoming. Borrowers have reaped the benefits. Those with money have paid the price. Wealth that can be redeployed is evaporating. Buying power is in decline. There is always a price. The reason is simple enough; it is the consequence of what the central banks are doing.

Curious why Treasury yields have ground lower this morning, considerably more than would perhaps be expected given the consumer sentiment data, and in the process have prevented the intraday "rotation" out of bonds into stocks, pushing the DJIA higher for the 11th consecutive day? The answer comes from the Fed which tipped its hand earlier and scared a few big bond shorts by issuing a Large Positions Reports from those entities which own more than $2 billion of the 2% of February 2023 (CUSIP: 912828UN8 auctioned off in February and reopened on Wednesday). In an unexpected request, and on the back of a surge in fails to deliver earlier in the week and the huge apparent buyside demand in the latest 10Y auction (Primary Dealers getting only 22.3% of the takedown in the UN8 vs typical 40-60%) which settles today, MNI reports that the Fed is now inquiring who has large chunks of the bond: something it has not done since February 2012.

Those expecting to see any indication of that mythical, if completely non-existent rotation out of bonds into stocks (which is really originating out of money markets and savings accounts, and has already tapered out), will not find it in today's US bond auction, which saw the Treasury sell $21 billion in Treasury paper at the low, low yield of just 2.029% (70.31% allotted at the high), below February's 2.046% auction yield, and stopping well inside the When Issued of 2.053% at 1 PM, indicating massive buyside demand and confirmed by all the internals. The Bid To Cover jumped to 3.19, the highest since October's 3.26, and far above the TTM average of 2.96. The Indirect take down was a massive 47.7%, the highest December 2011, when it printed at 61.9%, leaving 30% for Directs, and a tiny 22.3% for the Dealers, which was the second lowest Primary Dealer take down in history, higher only than July 2012's 14%. Overall a whopper of an auction, and confirmation that if anyone has lost interest in frontrunning the Fed, they sure were not in today's auction roster.

Chart of the Week Video: 10 Year Treasury Yields and Housing

We are wondering if and when these signals will have significance.

When you get this close to a record it’s just a matter of time before it gets taken out generally. Why today? Well, China reversed course psychologically by now stating it would expand “deficit spending by 50%” after just Monday putting the clamps theoretically on their housing bubble. That provided a big lift to Asian and European shares. With the latter more ECB talk about defending the eurozone and euro was fed bulls. Global markets also feasted on Fed Vice-Chair (the woman who would be king?) Janet Yellen that QEternity is not gonna change.

"Mission Accomplished" - With CNBC now lost for countdown-able targets (though 20,000 is so close), we leave it to none other than Jim Cramer, quoting Stanley Druckenmiller, to sum up where we stand (oh and the following list of remarkable then-and-now macro, micro, and market variables), namely that "we all know it's going to end badly, but in the meantime we can make some money" - ZH translation: "just make sure to sell ahead of everyone else", just like everyone sold ahead of everyone else on October 11th 2007, the last time stocks were here...

• GDP Growth: Then +2.5%; Now +1.6%
• Regular Gas Price: Then $2.75; Now $3.73
• Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
• Americans On Food Stamps: Then 26.9 million; Now 47.69 million
• Size of Fed's Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
• US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
• US Deficit (LTM): Then $97 billion; Now $975.6 billion
• Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion

I really need to stop being so pessimistic. I’m getting richer by the day. My home value is rising at a rate of 1% per month according to the National Association of Realtors. At that rate, my house will be worth $1 million in less than 10 years. Every mainstream media newspaper, magazine, and news channel is telling me the “strong” housing recovery is propelling the economy and creating millions of new jobs. Keynesian economists, Wall Street bankers, government apparatchiks and housing trade organizations are all in agreement that the wealth effect from rising home prices will be the jumpstart our economy needs to get back to the glory days of 2005. Who am I to argue with such honorable men with degrees from Ivy League schools and a track record of unquestioned accuracy as we can see in the chart below? These are the facts. But why trust facts when you can believe Baghdad Ben and the NAR? It’s always the best time to buy.

Remember when back in March Goldman presented the "Long good buy: the case for equities", when they, and everyone else of course, said the once in a generation opportunity to short bonds and buy stocks is here (and when BlackRock chimed along, saying the time to go all in... BlackRock ETFs.... is here)... Or when in September, right after QEternity, Goldman, having blown up previously on said trade, reiterated its call to go long stocks and short bonds (and when BlackRock chimed along again, saying the time to go all in... BlackRock ETFs.... is here). Well, so much for that. Or rather, those. As of last week, the speculative long exposure in the 10-year Treasury more than doubled in the past week, soaring from 79,296 to 169,456 net contracts, the highest position since March 2008. Looks like Uncle Ben will need to come up with more creative and counterintuitive ways to get traders to stop frontrunning him in purchasing every bond in the open market, and herd them into buying stocks...

Liar, Liar, Fed-Stoked Bubble Assets on Fire!!!!

As Bill Gross has been more than happy to demonstrate on several recent occasions, the recent sell off in US Treasurys has been sharp and violent, wiping out all year to date capital gains in the 10 Year in a few short weeks. The flipside to that is that this is not the first such headfake in the bond market, and it certainly will not be the last as David Rosenberg shows today with a chart summarizing all the "spasms" experienced in the 10 year Treasury since 2007. In fact, based on the average duration and move severity, the 10 Year sell off may not only continue for twice as long (on average it has been 49 days, and we are only 19 days in in the current sell off episode), but the final tally may be a further selloff well into the 2% range (the average decline in yield is 88 bps, double the 43 bps widening to date). At the end of the day will it make much of a difference? Very likely not: after all the deflationary implosion has far more to go before all the central banks engage in coordinated easing, and as a result superglue the CTRL and P buttons in the on position, leading to the final round in the global currency devaluation race.

Seven out of the seventeen economies that belong to the European Union that need to be bailed out. This is 41% of the Euro-17 that is in trouble. The second indication of decline is the recessions in Europe. In fact virtually all of Europe is in a recession and while Germany has held its head above the water I think by the third or fourth quarter that she is also mired in an economic decline. Europe is 25% of the global economy and this is beginning to affect the United States as exemplified by the declining revenues and profits of many American corporations that have so far reported out this quarter. The axes of the financial markets are America, Europe and China and with Europe in serious decline and China also contracting the strings are vibrating so that all of the markets are likely to go down. Even without some cataclysmic shock, realization is coming. The debts of Europe are being paid off with ever more debt and the can kicking will find its walls and as the European recession deepens it will be felt in America and then adjustments will have to be made - as fact overbears fantasy.

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