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Is the Ten-Year going to 3%?
Is the Ten-Year going to 3%?
Courtesy of Bruce Krasting
These two articles point in a bad direction:
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China’s 2011 total trade surplus was $183B. The surplus with the USA was $270B; the US was 150% of China’s total surplus. China imports lots of “stuff.” Crude oil is high on that list. Increased domestic consumption, plus additional imports for strategic storage, have pushed up imports to 6 million barrels per day in February. At that rate, the 2012 import bill for crude will be $250B, approximately equal to the US trade deficit with China.
The US/China trade deficit is creating USD surpluses for China’s largest crude suppliers, Saudi Arabia. Angola and Iran are the largest providers. These countries are not America’s friends, and they already have too many dollars. When Americans shop at Wal-Mart, they are actually sending dollars to Iran. In 2012, it will come to about $25B of “our” money that ends up with the Ayatollahs. Welcome to the global village.
As a result of the shrinking trade surplus and the need to import expensive crude, China does not have the investable dollars it once had. So it is no longer buying US Treasuries at the previous fast pace.
At the same time, the US Treasury is issuing debt at the rate of $100B a month. If the Chinese aren’t buying debt, then it must be sold to other dollar holders.
Saudi Arabia may end up with more dollars in reserves as a result, but I don’t think it will buy long-term bonds with this money. The money will stay in short-term securities. The Saudis will look at the 0.5% they can get on their money for 3-years (or the 5-year at 1%) and just say “no.”
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Let's return to the Bloomberg story and the seven-fold increase in bank holdings of Treasury paper:
Commercial lenders purchased $78.2 billion of Treasuries and securities of agencies in January and February, compared with $62.6 billion in all of 2011, bringing their holdings to $1.78 trillion, Fed data show.
It is a financial “unnatural act” when an A- rated bank can extend credit to a AA+ borrower and still make money in the process. This reverse credit arbitrage is made possible by the banks' willingness to "borrow short and lend long." The banks are doing it today because they have unlimited quantities of liquidity available to them through the repo markets at near zero cost. They are playing the carry trade. In the process, they are loading up their balance sheets with low yielding assets, and they are taking risks of rising rates. There is a limit to this.
As of this morning, many of those US financials that own the $1.8T of bonds are not so happy. The strong stock market, better economy and rising inflation expectations have clobbered the bonds the past few days. Some may think that the ten-year at 2.20% is a “buy”. But all I see in this chart is the “air” under the current price.
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Not surprisingly, inflation expectations have picked up:
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The easy answer to this conundrum is that the Fed will just keep buying more bonds to keep rates artificially low. I say it can’t do that. If the Fed announced tomorrow that it was going to “TWIST” the market to keep the ten-year at 2%, crude would rise to $150 in a month. Bernanke understands that.
Absent a new move by the Fed to contain long-term interest rates, the ten-year looks like it is headed to 3%. The Chinese are not buying, the banks are full up with paper (and underwater), PIMCO et al are long duration up the wazoo, and any thought that retail interest in five-year bonds at 1% will save the day is just misguided (dumb money is not that dumb).
Bernanke must be delighted today. His strategy all along has been to inflate the S&P and let rising asset values stimulate economic growth. His unlimited supply of cheap money has worked. But it has stoked inflation and that is now being transmitted to the bond market.
I think something has to give, either stocks back off and the economy cools, or the ten-year is headed to 3%. Bernanke can’t have it both ways. He’s about to learn that lesson.
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Wait till it hits 15
CPI has to run ahead of bond yields, so 3% implies 5% CPI, or 8% total return on a TIP bond. and rents are rising here in SoCal, a component of CPI. can Bernanke afford to front run that auction? either way the premium to par ratio on the TIP auction will go risk on, because you ain't going to get 8% on the S&P without leaving yourself wide open. the total TIP return is BE at 5% probably. and if its going to 15, the CPI will get there first. Now Ben only checks PCE? but the government pays on CPI? wonder how that will work?
i think i have to return some videos
Blockbuster video's?
They're out of business and i think that the rest switched to dvd's last time i checked...
Why would the Fed announce anything? They're likely "twisting" twenty different directions via dozens of other players already in ways they do not have to reveal.
As for crude going to $150, well it looks like it's going to happen anyway, so there's no real worry there. All it takes is one Iran headline, and Ben's got all of the cover he needs. Then of course, there's always the ole faithful standby whipping-boy, the evil speculators.
I guess people just can't get their head around the idea that Benron is not only out to destroy the economy, but the very financial system that enabled him, as it is unsustainable and has to be dealt with anyway.
ZIRP is a mechanism to transfer ALL wealth into the hands of the CBs. Because, simply put, you cannot compete with free money. All you can do is to consume capital trying.
What stupid shit will you buy when the dollar and bonds tank?
Food, if we are lucky.
Overlay a chart of a JPYUSD proxy like FXY with the TLT.
Big air.
Today was a good market day and a bad day for central banks. The fear in the market opened a door for Daddy Bernanke in 2008. Daddy arrogantly thought he was in control of the world as he played in his room. The market will shut the door and Daddy's room will be a prison.....poor Daddy!
Sooooooooo, if banks own $1.8T of Treasury debt at the weighted average duration of 5, they lost $18B today alone..yet XLF is up on the day?? Wow, equity investors are geniuses
Doesn't matter, they made more than that in AAPL today.
Without marked to market it simply has not mattered. What you did see in the EU mattered though and that is the deterioration of the LTRO and increasing margin requirements by the ECB on banks for the garbage they hold. That is likely where the selling pressure came from today. Keep your eye on this problem unfolding over there.
And this is one of those self-accelerating loops that could unfold very quickly, as margin calls weaken borrowers further. Europe is running out of collateral, even if we accept the ECB's tortured definition of pledgeable assets.
Silly Aunty, banks can't lose money. Besides, they're just holding it for a friend.
You believe anyone in the financial world cares about accounting rules. The day 'mark to market' was killed...par value rules.
8-10% within a year. Thanks Uncle Ben!
Smells like rising prices
Diesel all the way!
I have no faith in the bond market doing anything. 4 years of $1.2+ trillion dollar deficits and the 10-yr was trading at 2%?! Even 3% doesn't make sense.
I agree. TPTB will let stocks fall before they let bonds fall significantly. What's that saying about cutting off your hand to save your arm?
More like cut off our arm and beat us to death with it...
I have faith that there IS no bond market, but merely a Rube Goldberg machine that looks like one.
I wouldn't argue that the yield won't go to 3% (ratchet effect, after all), but I bet it will still end up lower in the future as the next chapter of ZIRP and QE is written.
As always...
ZIRP4EVA
Short of abdicating their power (which will never happen) it is the only choice they have. Print bonds with one hand, write the magic check to buy them with the other. All this talk of inflation expectations has no place in the year 2012. The only expectation that will matter is how much longer one can last in a global collapse.
Inflation expectations are market phenomena. 2012 is the year of politcal phenomena.
The 10-year was 3.6% less than a year ago.
Greece 10 yr went from 6% to 40% from fall 2010 to fall 2011.
When it goes boom it will go BOOM
Don't fret.
The 10 yr tnote will be at 3.5% before we can wrap up a thorough discussion of whether it's going to 3%.
Velocity is a bitch (for the wrongly positioned).
Wait until mortgages rise to their historic norm of 8% (for the BEST creditors at that!). That means the averag edeadbeat will have to pay what I did in the 1980's.....14%!
Now THAT was painful....after tax money no less.
84 - people were buying homes at 12% mortgage rates (and conventional, too - 20% down) when JOBS WERE PLENTIFUL BECAUSE THE FACTORIES AND R&D & TECH CENTERS HADN'T BEEN MOVED BRICK-BY-BRICK OVERSEAS OR TO MEXICO.
That's the big, open dirty sewer secret: Interest rates are marginal, so all of Bernanke's talk of the priority of driving rates to historical lows is bullshit. Jobs that are secure will give the employed to buy homes, cars and everything else at far higher rates!
Bernanke is full of shit.
Right ON! My wife(ex) and I bought our house in 1984 12% Va mortgage. I was a biomed tech, she a nurse. Modest jobs and income. Bernanke IS full of shit.
The crackup-boom won't come soon enough for me!!
I was actually a fully-functioning adult in 1984 with a small business, employees, etc.
Mortgages could be had @ 7% (construction loans were hard to get, I borrowed from a loan shark @ 24% plus points per year). The real estate bubble 1.0 was in full cry. The savings and loans were making ridiculous loans with zero-collateral, you just needed to know somebody. A few years later the whole S&L business blew up.
Factory jobs paid $5 per hour so the only persons who would take them were hispanics. Not even blacks would work in factories which soon closed. Yes, there were factories, even in New York: far more money to be had in developing the properties as 'lofts' for fancy people.
The govt was absolutely corrupt from the top (Reagan and his gang of cronies) to the bottom (county/municipal bosses all on the take from real estate developers).
How do you think all those hated municipal unions got the lavish payouts?
The only time the working man had a chance in this country was right after WWII when the women left the workforce to become wives and mothers. The rest of the world was smashed. Labor unions had clout with the big, centralized manufacturing steel, auto, railroad, rubber, glass, shipping and chemical cartels. By 1960, office work started to dominate labor, the factories became too expensive. China bailed out the brands starting when Nixon visited Bejing in 1973. Chinese textiles started to find their way into US clothing right afterward.
Closing the gold window had the (un)intended consequence of making it cheaper to ship US jobs overseas than to keep them here.
Gold-free money made imported fuel cheap along with imported cars, Japan and Germany became killer competition for US producers. R&D was done in universities and by NASA. Scientist was not a dirty word or another form of cheap import labor.
Velocity is the mother of inflation -- if velocity is a bitch then inflaiton is must be a dog because it screws anything that moves slower than it does.
Down Goes Frazier, Down Goes Frazier, Down Goes Frazier
http://youtu.be/JZEIMQ42-oU
My Magic 8 Ball just said "definitely," Bruce, and when I asked it when, it replied "sooner than Bernank would like."
It would appear that The Bernank's '15 Minutes' expired some time ago and Mr. Market is not going to be very understanding.
Saudi Arabia may end up with more dollars in reserves as a result, but I don’t think it will buy long-term bonds with this money. The money will stay in short-term securities. The Saudis will look at the 0.5% they can get on their money for 3-years (or the 5-year at 1%) and just say “no.”
The Saudis (and all the other pro-Amerika OPEC despots) need the US' military or they're toast, and they know it. If Uncle Sam tells them they need to buy, they'll buy, even at -ve rates.
And we (ie, the Fed) can always do more QE through some anonymous Cayman Islands trusts. Who's going to know? When Ron Paul's grandchildren finally convince our sheep to tell our 'leaders' we need to audit the Fed?
When the yield starts rising, it means the wheels are finally, FINALLY, coming off the bus. If Iran manages to torpedo a couple of carriers and the Russians and Chinese sink a few more (while flying Iranian flags, obviously) then the ME despots might tell Sam to take a hike. Not before.
Welcome to the "Arab Spring". Saudi Arabia has had to raise their "subsidies" to their population from the equivalent of $56 a barrel from oil production to approxoimately $72 a barrel. Any falling oil price would savage what is left of America's Arab "friends" in the Middle East. Ben Bernanke is exporting comodity inflation as a geopolitical strategy.
It's all starting to make perfect sense now why we spend more than the rest of the world combined on our military, and it ain't because we're worried about Red Dawn. Perhaps we will be the one exception in all of human history where an empire has not collapsed under it's own weight and hubris. I suppose the guys at the top don't care because they've got theirs and that's all that matters to them.