• GoldCore
    07/30/2014 - 18:58
    “But long term...and economic law says, if you keep printing a lot of paper money, the value of the dollar and currency will go down, and things and most prices will go up and indeed gold always goes...

Yield Curve

Tyler Durden's picture

Independence Day Overnight Market Summary





Given the US holiday, markets are likely to be thin today but there are some big news stories floating around at the moment.  If the fast and furious events from the past few days in a revolutionary Egypt bear a striking resemblance to what happened in the spring of 2011, it is because they are strikingly comparable. Only this time, following the ouster of yet another US-supported "leader" by the US-supported military, the country's CDS has normalized at a level that is roughly double where it was two years ago as the implicit backing of the US looks increasingly shaky, following what was yet another bungled foreign policy venture by the Obama administration. But for now, the people are celebrating, just as they did in 2011. One wonders what happens between now and the next coup, somewhere two years (or less) hence. For now focus merely on who controls the Suez - after all that is really all that matters for the US. The other major story of yesterday, Portugal, continues to be in limbo,

 
Tyler Durden's picture

Guest Post: Everything Is Being Sold





Global financial markets are now in a very perilous state, and there is a much higher than normal chance of a crash. Bernanke's recent statement revealed just how large a role speculation had played in the prices of nearly everything, and now there is a mad dash for cash taking place all over the world. Collectively, the move away from commodities, bonds, and equities in all markets globally tells us that there's nowhere to hide and that this is a 2008-style dash for cash. Everything is being sold, as it must, to meet margin calls, pay down leverage, and get out of positions; all are signs of the end of a speculative phase.

 
Tyler Durden's picture

China's Red Flags





UPDATE: China 7-day repo +374bps to 12%! China Flash PMI 48.2 (49.1 exp) - lowest in 9 months; worst 3-month plunge since Feb 2011.

Following the hushed-up default by Everbright Bank last week, the liquidity situation in China has gone from bad to worse - with 1Y IRS now at all-time record highs. Many are now questioning whether the dramatic elevation in short-term financing rates is "here to stay," and with the Chinese yield curve now inverted in a similar fashion (and period) as the US Treasury market prior to the US recession in 2007, the clarion call for government stimulus is loud from the addicts. However, as HSBC notes today, since the government is now putting more emphasis on balanced growth and market reforms, it will tolerate GDP growth in the 7-7.5% range and will therefore take no strong measures to boost growth unless there is a risk of growth slowing to 7%. The red flags are piling up in the world's supposed growth engine...

 
Tyler Durden's picture

Goldman Slams Abenomics: "Positive Impact Is Gone, Only High Yields And Volatility Remain; BOJ Credibility At Stake"





While many impartial observers have been lamenting the death of Abenomics now that the Nikkei - essentially the only favorable indicator resulting from the coordinated and unprecedented action by the Japanese government and its less than independent central bank - has peaked and dropped 20% from the highs, Wall Street was largely mum on its Abenomics scorecard. This changed overnight following a scathing report by Goldman which slams Abenomics, it sorry current condition, and where it is headed, warning that unless the BOJ promptly implements a set of changes to how it manipulates markets as per Goldman's recommendations, the situation will get out of control fast. To wit: "Our conclusion is that the positive market reaction initially created by the policy has been almost completely undone. At the same time, a lack of credible forward guidance for policy duration means that five-year JGB yields have risen in comparison with before the easing started, and volatility has also increased. It will not be an easy task to completely rebuild confidence in the BOJ among overseas investors after it has been undermined, and the BOJ will not be able to easily pull out of its 2% price target after committing to it."

 
Tyler Durden's picture

1994 Redux? But Not In Bonds





In UBS' view, 1994 is critical for guiding investing today. The key point about 1994 was not that US bond yields rose during a global recovery. But that the leverage and positioning built up in previous years, on the assumption that yields would remain low, then got stressed. The central issue, they note, is that a long period of lacklustre growth, low rates and easy money induces individual investors, funds, non-financial corporates and banks to reach for yield. In many cases, they gear up to do it. And as Hyman Minsky warned; in this way, stability breeds leverage, and leverage breeds instability. It is much less likely that we see the US enter a ‘high plateau’ of growth as we saw from 1995-98, where the US saw a powerful productivity & credit fuelled boom while the emerging markets deflated. And it makes it more likely that the US stays on a lower trajectory, interspersed with periodic recessionary slowdowns in the years ahead. The point at which the market realises this would likely herald a significant risk-off event.

 
Tyler Durden's picture

Why The BoJ’s Policy Is Inherently Destabilizing





One glance at the chart below and it is very clear that there is a glaring difference between the market's reaction to the Fed's QE and the BoJ's QQE. Aside from the magnitude and velocity of the equity market response that is, the Fed has been inherently volatility-suppressing (with VIX near all-time lows as stocks rise) while (aside from the last week or so), as the Nikkei surged, Japanese implied volatility also surged. As UBS' Larry Hatheway notes, fundamentally, Japan’s policy settings and preferences (moving from deflation to inflation, which is the stated objective of ‘Abenomics’) embed a great deal of implied volatility, only some of which has already manifested itself in asset prices. The proverbial cat has been thrown among the pigeons - scatter they must - the Fed’s QE has dampened volatility while the BoJ’s QE has boosted volatility. In sum, the price of success - where success is defined as ending deflation in Japan—is likely to be significant volatility in Japanese asset markets.

 
Tyler Durden's picture

Guggenheim On The Canary In The Coalmine





Ongoing monetary stimulus is leading to heightened volatility, and the bull market which has been in place since 2009 is becoming overextended. The recent string of surprise downside moves in markets may be the canary in the coal mine for global investors. This is where we are today. The tide is rising for U.S. and Japanese markets and asset prices will ultimately move higher. The size and violence of each wave that advances or recedes will continue to increase due to the surge of liquidity from central banks. These tides of liquidity are strong, as are the currents underneath. We must guard ourselves from the risk of being pulled under.

 
Tyler Durden's picture

Does A Rising Yield Curve Lead To Net Interest Margin Improvements?





Common wisdom, which in this market of media-led hope and hysteria rapidly becomes the meme-du-jour, is that, as American Banker puts it, for banks that are currently earning slim yields on stagnant pools of loans, higher interest rates are a welcome prospect. However, in reality (that annoying fact-based world in which we really live) Net Interest Margins (NIM) are not so simple and linear and in fact. There is simply a lot of noise in NIM figures. Data over the last decade or so hints that there is a positive link between how steep the yield curve is and how wide net interest margins are - which makes sense to the extent that banks lend long and borrow short - but imbalances in the durations of assets and liabilities are risky and a more important factor for short-term changes in margins is whether banks are positioned to be hurt or helped by a simultaneous move in rates across the curve. The bottom line - rising rates and steepening curves do not infer higher NIM - facts are facts.

 

 
Tyler Durden's picture

"Ze Price Stabeeleetee": The Market Impact Of The BOJ's Interventions





Because when your primary stated goal is achieving "price stability" through unprecedented intervention, and instead you break the markets (both bonds and stocks) it may be time to reevaluate. As a reminder: "The Bank of Japan, as the central bank of Japan, decides and implements monetary policy with the aim of maintaining price stability. The Bank of Japan Act states that the Bank's monetary policy should be aimed at achieving price stability, thereby contributing to the sound development of the national economy." Instead, you get this...

 
Tyler Durden's picture

Japan Central Bank Admits Sending Schizophrenic Signals To Market As JGB Liquidity "Evaporates"





It doesn't take an Econ Ph.D to realize that what Japan is trying to do: which is to recreate the US monetary experiment of the past four years, which has had rising stocks and bonds at the same time, the first due to the Fed's endless monetary injections (and pent up inflation expectations) and the second due to quality collateral mismatch and scarcity and shadow bank system funding via reserve currency "deposit-like" instruments such as TSYs, is a problem. After all, those who understand that the BOJ is merely taking hints from the Fed all along the way, have been warning about just that, and also warning that once the dam breaks, and if (or when) there is a massive rotation out of bonds into stocks, it is the Japanese banks - levered to the gills with trillions of JGBs - that will crack first. Apparently, this elementary finance 101 logic has finally trickled down to the BOJ, whose minutes over the weekend revealed that members are pointing out "contradictions" in the Kuroda-stated intent of doubling the monetary base in two years, unleashing inflation, sending the stock market soaring, all the while pressuring bondholders to not sell their bonds. As the FT reports, "According to the minutes of the April 26 policy meeting, released on Monday, a “few” board members said the BoJ’s original stance “might initially have been perceived by market participants as contradictory”, causing “fluctuations in financial markets”.

 
Bruce Krasting's picture

Bond Vortex In The Works?





I see this evolving story as a possible turning point. The key CB's will have gone from Offense to Defense.

 
Tyler Durden's picture

BNP Warns On Japanese Repression: Echoes Of The 1940s Fed





In the 1940s, the Fed adopted pegging operations to protect the financial system against rising interest rates and to ensure the smooth financing of the war effort. In effect, the Fed became part of the Treasury’s debt management team; as the budget deficit hit 25% of GDP in WW2, it capped 1Y notes at 87.5bps and 30Y bonds at 2.5%. From the massive bond holdings of its domestic banks to its exploding public debt, Japan today faces a situation very similar to the US in the 1940s. When the long-term rate climbs above 2%, the BoJ will probably adopt outright measures to underpin JGB prices to prevent turmoil in the financial system and a fiscal crisis - and just as Kyle Bass noted yesterday, they are going to need a bigger boat as direct financial repression in Japan is unavoidable.

 
Tyler Durden's picture

Dudley Terrified By "Over-Reaction" To QE End, Says Fed Could Do "More Or Less" QE





Up until today, the narrative was one trying to explain how a soaring dollar was bullish for stocks. Until moments ago, when Bill Dudley spoke and managed to send not only the dollar lower, but the Dow Jones to a new high of 15,400 with the following soundbites.

  • DUDLEY: FED MAY NEED TO RETHINK BALANCE SHEET PATH, COMPOSITION
  • DUDLEY SAYS FISCAL DRAG TO U.S. ECONOMY IS `SIGNIFICANT'
  • DUDLEY: FED MAY AVOID SELLING MBS IN EARLY STAGE OF EXIT
  • DUDLEY: IMPORTANT TO SEE HOW WELL ECONOMY WEATHERS FISCAL DRAG
  • DUDLEY SAYS HE CAN'T BE SURE IF NEXT QE MOVE WILL BE UP OR DOWN

And the punchline:

  • DUDLEY SEES RISK INVESTORS COULD OVER-REACT TO 'NORMALIZATION'

Translated: the Fed will never do anything that could send stocks lower - like end QE - ever again, but for those confused here is a simpler translation: Moar.

 
Tyler Durden's picture

Toyota Pulls Bond Deal Due To Soaring Yields: The Japanese "VaR Shock" Feedback Loop Is Back





Despite the eagerness of Abenomics and the new BOJ head Kuroda to have their cake and eat it too, in this case manifesting in soaring stock prices, plunging Yen, rising GDP and exports, and most importantly, flat or declining bond yields, so far they have succeeded in carrying out three of the four, as it is physically impossible for any central planner to completely overrule the laws of math, economics and physics indefinitely. Volatility aside the recent surge in yields higher is finally starting to take its tool on domestic bond issuers. As Bloomberg reports, already two names have pulled deals from the jittery bond market due to "soaring" borrowing costs. The first is Toyota Industries which as NHK reported, canceled the sale of JPY20 billion debt. Toyota is among Japanese firms that put off selling debt as long-term yields on government debt have risen, increasing borrowing costs, public broadcaster NHK says without citing anyone. Last week JFE Holdings announced it would delay plans to sell bonds due to market volatility. So two names down... and the 10 Year is not even north of 1%... But perhaps, more importantly, what happens to JGB holdings as the benchmark Japanese government bond continues trading with the volatility of a 1999 pennystock, and as more and more VaR stops are hit, forcing even more holders to dump the paper out of purely technical considerations: a topic we touched upon most recently last week, and which courtesy of JPM, which looks back at exactly the same event just 10 years delayed, now has a name: VaR shocks.  For those who wish to skip the punchline here it is:  A 100bp interest rate shock in the JGB yield curve, would cause a loss of ¥10tr for Japan's banks.

 
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