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The Party Is Over In The Treasury Market
By EconMatters
Last Hurrah
Everybody knew the GDP number was going to be revised down on this reading, and that it probably gets revised up for the next reading, and Bond Traders used the Revision in first quarter GDP to take the 10-Year Yield down to 2.4% on a nice push, but this required a whole lot of ammunition, and as soon as Europe started to close at 10 am central time (Europe close is 10:30 am for practical purposes) the Traders needed to start closing some of these positions.
Bottom in the Bond Market
The 10-Year then went 7 basis points higher to actually end the day up, which in trader`s terms is an outside reversal, or a very bullish sign for 10-year yields going forward, this effectively is the bottom for the 10-year bond yield for 2014, 2015, 2016 and beyond.
Read More > The Bond Market Explained for CNBC
Mark this date in your calendars as the last time the 10-year Yield was this low, we mentioned in an earlier article about this market being a coiled spring, well just sit back and watch the carnage as everyone tries to run for the exits at the same time in the bond market. Grab some popcorn because this is going to be funny over the coming months and years as yields continue to rise, some poor sap actually bought a 10-Year Bond today at 2.41% Yield, and thought this was a good investment.
Stop Trading on 3 Month Old Data
Bonds should have never gotten this low, everyone and their mother is underestimating inflation going forward, and the idiots on the Federal Reserve are so behind the curve, still talking about data 3 months old. By the time they realize we not only have food and energy inflation, but that wage inflation is coming in the next three months if not sooner, the absolute wrong-footed Federal Reserve & Bond Market are in for the shock of their lifetimes.
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Massive Outflows Coming in Bond Funds
Literally bond funds are going to see such outflows, there are going to be money managers and hedge funds going out of business on this chasing yield trade blowing up in their faces. Margin clerks will be tapping a bunch of folks on the shoulders the next 6 months and beyond on this massive unwind in bond markets.
I have never seen a market where so much money, and the consensus view is so wrong on this trade; the unpreparedness, the fact that not only do these people Not have an Exit plan, they don`t even know they need one on this trade.
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This is like the housing market can never go down logic; that interest rates will never go to 4% in their lifetime unpreparedness. Remember the Fed Funds Rate was 5.5% right before the financial crisis in 2007, this is hardly a century ago, it occurred in the last 10 years.
Federal Reserve Members are Clueless
I used strong language when I called the Federal Reserve members idiots, but the more I hear these people talk about the economy, this includes Bernanke now that he is retired, I cannot believe these are the best and brightest economists that America has to offer, because they are totally clueless. Even the hawks on the Fed are behind the data curve by at least 3 months, inflation is here, they better start raising rates next week.
Read More > Is Janet Yellen Smarter Than Me?
Equities Running on Inflation Power: Forget Valuations at this Stage
This is what the stock market is telling everyone, and I like everyone was waiting for a summer pullback, a bunch of Hedge Funds starting shorting the market in anticipation, going long bonds; but inflationcannot be held back once it takes hold, and equities are off to the races, there will be a short squeeze in equities going forward.
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Once people realize what is going on with the reality that this cheap money has finally reached escape velocity with nowhere to go, and bonds are no longer an option once the realization that inflation is going to force the Fed`s hands, all this money is going to finally rotate out of bonds and into equities. We could literally see 2500 in the S&P 500, while the Fed tries to soak up this excess liquidity in the financial system.
I am not sure how it will play out in equities once Bond yields spike, but where does the money go? Does everyone just run to cash? There are two things I am solid on however, one is that bond yields are going to explode higher, and the other is that volatility is also going to go much higher, so who knows how this is all going to play out in the equity markets. Maybe bonds and stocks sell off together.
Yield Trade Pushed Down Volatility
The abundance of money chasing the yield trade has pushed down volatility, and as the yield trade unwinds there are going to be some volatility traders that go out of business as well. I just cannot fathom how so many investors and traders are currently poorly positioned for one of the biggest moves in markets coming down the pike since the tulip market collapse.
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Bond yields are in a bubble all over the planet, and first you have food and energy inflation, then you have wage inflation to pay for the rising food and energy costs due to the final piece of the puzzle in the tightening labor market. The US exported a bunch of inflation to emerging markets over the last five years, now it is our turn to experience inflation as a result of too much cheap money in the system.
We are currently right at the tipping point of inflation, and nobody sees it at the Federal Reserve, why do you think there are all these minimum wage initiatives? It is because a loaf of bread costs $3-$5 dollars in the United States depending upon the market. Of course wage inflation is going to be the next shoe to drop!
Talking about an Exit Strategy, Isn`t an Exit Strategy
I am sorry it is very apparent that not only is the Fed behind the inflation curve, they literally are making Fed policy up as they go along, they have no exit strategy whatsoever, and more painfully obvious is that Wall Street doesn`t realize that the Fed has no exit strategy. The learning curve is going to be painful as always for Bond Holders, who will be the last fool to own a bond in their portfolio? There will always be some Bag Holder in financial markets, and this time it is Bond Investors or should I say Yield Chasers!
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Outflows to US, Asian and European equities will be like pigs to slaughter, they're dead and yet they don't know it yet.....their also dead if they stay where they are.....Banana Republics might be the safest place to be?
Ask McAfee how that worked out.
You better believe they have an "Exit Strategy" -- the ticket counter at El Al Airlines for a one way trip (If they don't have a private jet).
this guy never really says 'why' anything, like a sudden sell off in tsy's would occur. rising interest rates and/or inflation are not a positive force for equities--this fallacy is very commonplace. demand pull inflation resulting in higher interest rates would follow a rising stock market-- under normal circumstances. today is pure monetary policy, if rates were to go up stocks would fall dramatically and the deficity would go to the moon, hard assets might get bid at first then liquidated to cover debt service.
Wrong EconMatters, PE multiples are ALWAYS a function of 10 Years rates. 10 Years rate shoot up and you have 1966 type of scenario where BOTH the equities AND teh bonds markets suffer. The reason why Equities market were trading at single digit multiple in the 1970s was because inflation forced Treasuries rate higher and forced a contraction of multiple. The rates will rise but will stay negative in real terms (they will not outpace the inflation). They will outpace inflation when the debt is inflated away that the Fed can afford to have positive rates (this need the Gov debt to be low in relation to GDP, because positive real rates affect the real cost of borrowing of the Gov).
The ratio of Financial assets (promises of future cash flows, i.e. Debt but also Equities albeit with some sort of protection against inflation -- not the best though -- ) will shrink in relation to present goods (the stuff circulated in the economy, i.e. the GDP). Present goods include goods and services, commodities and Gold (Gold has immediate value, it is not a stream of cash flows promised in the futures.
A level-headed critique.
One caveat I see, where you mention inflation, in the 70's the cause of inflation was supply related.
Currently, we have the inverse, a demand problem with no foreseeable supply shortages outside of crop problems the last two years that are apparently reversing (wheat and corn crops look good this year, so far).
If your idea on inflation revolves around the extremes in excess reserves, it seems like the rule change in 2008 to pay interest on E/R's has worked, so far, and a lot of pundits seem to have forgotten to factor that into how it changes the way Fed policy affects inflation relative to the past.
"It is very apparent the Fed literally are making policy up as they go along"
Like a race car driver in a spin - they just let go of the wheel and hope for the best
I've more or less stopped reading anything this guy has to say. It's transparently self serving.
The best response is to never again click his link, and be loud about that.
Are you saying the bond vigilante is back?
Silly boy....
That's another point that might back this bloggers thesis.
We haven't heard CNBC talk about "bond vigilante's" for a few years now.
Back in 2009 - 2010, it seemed like all the craze for CNBC pundits was to engage in histrionic rants about "the bond bubble!!", now we hear nothing, yet rates are even lower and CNBC consensus is now long.
On the other hand, CNBC talking heads have been totally perplexed that yields are going down, so sure that it is a short squeeze, even as the shorts have doubled down. They are probably wrong about yields just because they usually are wrong.
In any case, a world where socialist, bankrupt France has lower yields than the U.S. while JGBs yield almost nothing is an example of situation that will only on until it can't anymore.
Global treasuries are similar to currencies in relative terms, default to the cleanest shirt in the hamper when they're all dirty.
Yep, rising rates are always good for the stock market. Don't go to cash, go all in on equities. Thanks for the advice!
This is one possibility. The EU liquidity play is the other. It too is coming. Right not the Euro owners are fealful of inflation, then they will fear Draghi like death. WE shall see as we must.
Utter bs... another frustrated bond bear being slaughtered probably. Whats a fair value for 10y treasury in world without growth, poor demographics, non existent wage inflation and QE about to be stopped (or paused at least)? <1%
There's no such thing as a "treasury market party" you ignorant lying turd. There is so much issuance in that space "the only the Scary Paper" soars is because somebody...everybody actually...just DIED.
Bullshit. Debt needs to be serviced and liabilities need to be funded. Baring a world war, the yields on treasuries will go negative before they go higher.
I wonder what bank this useless paper-pusher works for?
Funny that he doesn't show a chart that goes back 40 years. As another one mentioned, QE has been happening for about 30 years.
True about service costs.
Specifically the household debt to income ratio, the biggest drag on consumption.
But that ratio is down 20% since 2007 from consumer deleveraging, even while wages are still down.
If wages begin growing while rates are this low, it would equate to substantial increases in disposable income, the Fed would have to react.
The counter is that wages have been flat for decades, but with the topic being talked about by so many pundits, being used in campaign platforms, and locals mandating min wage increases, that trend may change.
Even the Republican Gov of Michigan just increased min wage to $9.10, that's a 24% wage increase for a large fraction of the population with the highest multiplier.
Gutsy call:
"Mark this date in your calendars as the last time the 10-year Yield was this low, we mentioned in an earlier article about this market being a coiled spring, well just sit back and watch the carnage as everyone tries to run for the exits at the same time in the bond market. "
I've been swing trading short treasuries for a couple of years, in part as insurance against Fed reaction to wage inflation.
I didn't increase my position yesterday, hoping to see rates go down a little more, in that sense I hope this blog is wrong so I can add to my position.