Yield Curve

For a decade or two, it's been dubbed the widowmaker (though truth be told, the losses are more bleed than massive capital loss like those holding US growth stocks currently), but as Barclays notes the Japanese bond market 'conundrum' (that nothing like a recovery is priced into the JGB curve, which is failing to price even a partial, eventual success of the Abe government's reflationary agenda) may finally be ready to be played..."We are always on the lookout for asset prices that seem inconsistent with the more plausible economic and financial scenarios. Sometimes these discrepancies point toward necessary alterations of our fundamental world view. In other cases, they point toward investment opportunity. At the moment, one of the most glaring discrepancies between macro and markets is the long end of the Japanese curve."

So much for the infallible Mr. Dimon.

Moments ago, JPM reported Q1 earnings which missed across the board, driven by the now traditional double whammy of collapsing mortgage revenues - the lifeblood of any old normal bank - and fixed income trading revenues  - the lifeblood of new normal banks. Specifically, JPM reported revenues of $23.9 billion, well below the expected $24.5 billion, matched by a reported earnings miss of $1.28, down from $1.59 a quarter ago (and down $0.02 from Q4, 2014), also missing consensus estimates of $1.38. The breakdown was as follows.

With 30 year bond yields set to close their lowest in 10 months, CNBC's Rick Santelli is concerned at the signals that the Treasury yield curve is sending.If yesterday's minutes from the Fed were supposed to walk back their 'hawkish' tone, then Santelli slams they are "gonna need a really big billboard" because the term structure is still flattening. "When 'flattening' is the theme, that is not painting a rosy outlook for the long-term economy," and as Santelli warns, this is when the Fed is pulling out of its extraordinary policies. Santelli screams, "the entire monetary policy side has to be under review... and the only way you can keep the fallacy alive is "if you sell it as a 'deflationary' issue, where you can keep trying the same thing that isn't working."

Yesterday's 10 Year auction may have been surprisingly weak, perhaps concerned about what the subsequent FOMC minutes would reveal (as it turned out the minutes couldn't have been more dovish - just as everyone knew would be the case - and sent 10Y yields sliding) but today's 30 Year reopening (Cusip: RE0) auction was quite brisk, with the high yield of 2.535% stopping through the When Issued of 2.537% by 0.2 bps. And for those who have been living under a rock and unfamiliar with the epic flattening in the yield curve, today's 30 Year was the tightest pricing since the 3.36% yield last seen in the auction from June 2013.

For the first time since the bailout/restructuring, Greece will issue long-term debt to the public markets. These 5 year-term English Law bonds (which is entirely unsurprising given the total lack of protection local-law bonds suffered during the last restructuring) are expected to yield between 5 and 5.25%. That is modestly higher than Russia, below Mexico, and one-sixth of the yield investors demanded when the crisis was exploding. The secondary market has rallied to this entirely liquidity-fueled level leaving onlookers stunned (and likely Draghi et al. also). Greece must be 'fixed' right? Just don't look at the chart below...

Market consensus is that deflation remains the greatest threat to the global economy. But that's ignoring signs of impending inflation, particularly in the US.

One of the evils of massive over-financialization is that it enables Wall Street to scalp vast “rents” from the Main Street economy. These zero sum extractions not only bloat the paper wealth of the 1% but also fund a parasitic bubble finance infrastructure that would largely not exist in a world of free market finance and honest money. The infrastructure of bubble finance can be likened to the illegal drug cartels. In that dystopic world, the immense revenue “surplus” from the 1000-fold elevation of drug prices owing to government enforced scarcity finances a giant but uneconomic apparatus of sourcing, transportation, wholesaling, distribution, corruption, coercion, murder and mayhem that would not even exist in a free market. The latter would only need LTL trucking lines and $900 vending machines. In this context, the sprawling empire known as Bloomberg LP is the Juarez Cartel of bubble finance.

With another session in which US futures levitate into the open, despite a modest drop in the Nikkei225 (to be expected after the president of Japan’s Government Pension Investment Fund, the world’s largest pension fund, said that a review of asset allocations into stocks is not aimed at supporting domestic share prices) and an unchanged Shanghai Composite while the currency pair du jour, the USDCNY, closes higher despite tumbling in early trade (which also was to be expected after a former adviser to the People’s Bank of China said China is headed for a “mini crisis” in its local- government debt market as economic reforms lead to the first defaults) everyone is asking: will it be deja vu all over again, and after a solid ramp into 9:30 am, facilitated without doubt by the traditional Yen carry trade, will stocks roll over as first biotech and then all other bubble stocks are whacked? We will find out in just over two hours.

Despite dismal PMIs from China and USA, stocks managed a miraculous 'pump' into the US open only to be unceremoniously dumped very soon after as MoMos and Biotechs had the rug pulled out. Weakness continued down to Nasdaq's 50DMA (and Biotech's 100DMA) and stabilized into the European close when soon after, via the magic of EURJPY, stock rebounded back to VWAP. Alas, it was not be the day for the bulls as VWAP-selling hit hard in the last hour... until the good fairy 330RAMP CAPITAL came along, and punched VIX in the mouth in a desperate attempt to regain green and get the Dow positive post-FOMC. Unlike many fairy tales though, this one ended sadly ever after. Stocks down, USD down, Gold down, VIX up, Yield Curve down to 2009 levels.

Despite the total collapse (flattening) in the Treasury yield curve in the last 2 days, Citi's FX Technicals group is convinced that we have seen a turn in fixed income that will see significantly higher yields in the years ahead and notably higher yields by this yearend also. Furthermore, they believe this will initially come from the belief in a continued taper, and the curve will initially steepen (2’s versus 5’s and 2’s versus 10’s). This normalization, they add, will be a good thing - QE encourages misallocation of capital and poor business decisions which has a negative feedback loop into the economy - but add (as long as yields do not go too far too fast like last year).

Once European markets closed, US equity markets gave up any correlation with JPY crosses and began to fade. After bouncing off early Nasdaq-Biotech-driven lows, a ramp of AUDJPY saved the European close but that was it. There does not appear to be any news catalyst to drive this dump as Quad-witching pumps are unwound. The S&P 500 and Russell 2000 jooin the Trannies and Nasdaq in the red from the FOMC statement.

Yesterday's news from the NAR that in February all cash transactions accounted for 35% of all existing home purchases, up from 33% in January, not to mention that 73% of speculators paid "all cash", caught some by surprise. But what this data ignores are new home purchases, where while single-family sales have been muted as expected considering the plunge in mortgage applications, multi-family unit growth - where investors hope to play the tail end of the popping rental bubble - has been stunning, and where multi-fam permits have soared to the highest since 2008. So how does the history of "all cash" home purchases in the US look before and after the arrival of the 2008 post-Lehman "New Normal." The answer is shown in the chart below.

Remember when we said in January 2011 that Dealers merely game the daily POMO reverse auction to generate abnormal - and now confirmed criminal - profits on the back of the central bank, i.e. taxpayer? Guess what - we were right. Again.

One of these markets has recovered all of the post-Yellen move from yesterday... (and only one)...

While the sight of Russian flags, pro-Russian troops, and Russian navy ships in Crimea is now a day-to-day thing; this morning brings a new normal for the eastern Ukraine region - long lines at bank ATMs as the bank runs have begun. We noted last night the dreaded inversion of Ukraine's yield curve, the greater-than-50% yields on 3-month Ukraine government debt, and the pressures on local bank debt maturities as the ability to garner dollars cost-effectively was becoming a problem but on the heels of concerns by the head of the central bank that moving cash in Crimea was difficult, ATM withdrawal limits have been cut. People in long ATM lines are reported to be concerned because "banks are closing" but it is Deutsche Bank's comments this morning that raised many an eyebrow as they suggest that Ukraine's debt is pricing in a "burden-sharing" haircut for bondholders (which as we have seen in the past - in Cyprus - can quickly ripple up the capital structure and become a depositor haircut).