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Death By Carry
Authored by Bill Blain of Mint Partners,
These are not easy times for the global bond market. We’re looking at US Treasuries market (more below), and reckon this morning’s 10-yr spike to 2.23 is only the start. We could see more aggressive price declines as the curve steepens further. It’s only partly based on the better economic outlook and fears of the QE Taper. Japan banks will be among the biggest sellers due to the volatility and “death by carry”. Forget the stories Japan banks were buyers at the wides.. that’s wishful thinking from Treasury holders long and wrong on the US bond market.
Meanwhile, my Tech Chart Expert, Graham Joy points out some interesting data – “Dow 20 for 20 Turbo Tuesdays: up 11% on the year, but without Tuesdays would be only 0.2%!.. 20 Tuesdays in a row since Jan 25th!
But start in Japan where tensions are building. The Kuroda plan is failing to reign in JGBs - increasing bond volatility and weak demand for the latest 20-yr auction illustrate the widening credibility gap between what the BOJ expected and what’s actually happening! JGB futures vol is now highest since 2008.
What's required to calm the JGB market? Unfortunately, each passing day sees the BoJ's credibility chipped away. Far from lowering Japan rates, many analysts now believe the massive Kuroda QE ease was a desperate play likely to backfire, resulting in unsustainable interest rates. Kyle Bass in the ascendency! It’s a vicious negative feedback loop.
Step back a second. Yes, the plan does appear to have stalled, but what plan ever survives first contact with the enemy? That’s part of the problem – even a good plan could wither if exogenous forces, like a Treasury sell off, make it meaningless. After telling us how lower JGB rates were vital to the plan, Kuroda does not sound nearly so convincing when he's telling us the financial system can weather higher yields alongside an economic recovery! The FX boosted export recovery is highly vulnerable to reversal or at best slow down in the face of other countries competitively devaluing.
On the other hand, the reason Japan got away with the massive devaluation of the yen was the complicit support of China and US within G20 to ensure it was accepted as the most likely driver of global growth. I doubt other economies will get similar breaks. Remember the key market mantras: "Don't fight Central Banks" and more recently "Don't fight Kuroda". But.... if you see the Yen start a steady recovery, (fuelled by the more attractive rates), that’s the point to consolidate or even advance in a rearwards direction on Japan.
Back to the US. Rising home prices trigger further fears of an early taper to the mortgage part of QE. Take a look at expectations for US futures and they show the market anticipates rising rates. Can't fight what the market is telling you! Over the next couple of weeks I expect the market scribblers will play catch up – watch for the increased US economic estimates. Last year I took a bit of a flyer and blythely said US growth could be a surprising 3% plus by year end - despite the recent negativity and mixed noises off, I still think its achievable!
It all spells further rates sell off – and all the implications for other frothy asset bubbles. Rising US rates really will trigger a global bond bear market, so some advice for European banks still long of distressed assets held on "pretend and extend" banking books. (i.e. distressed European lending marked at par in the hope the global and European economies will recover sufficiently these assets will repay at 100.) Take a look at what Lloyds is doing.
Lloyds is auctioning its US$8.7 bln mortgage portfolio - smart move! WIth the market fearing the Fed may hold back on supporting US mortgage paper... then selling what used to be distressed product now makes sense... And remember, Lloyds is the UK bank with the good sense to take the pain when it could - selling off its Irish mortgage book and large chunks of distressed UK Commercial Mortgages. Sure it took the capital hit, but now looks significantly stronger institution.
How many other European banks should be considering similar "distressed asset sales"? Well this is the time to be doing it! We are in touch with a number of investment funds who are active acquirors of distressed assets. Too many European banks are still sitting on Spanish mortgage exposure (it’s going to get worse), European SMEs (its going to get worse), securitisations (they are going to get worse), etc etc.. Forget the asset class, and think about yesterday’s miserable French consumer sentiment – yep.. Europe is going to get worse!
But why sell distressed assets now? After all, wont the ECB backstop everything to prevent renewed Euro fears. We've seen the mother of benchmark distressed assets, Greece, trade up all the way from 20% to 8%. CFO's overseeing the distressed books must feel vindicated for not selling at the bottom of the market, and seeing values recover close to par in many instances. Well done.
But the next step is the difficult one - knowing when to sell. I reckon that point has come: we've seen sustained bond market gains and pretty much exhausted further upside. From here on in the risks are about deepening European recession eroding gains thus far.
Finally.... reading a predictable Torygraph rant this morning about how Portugal is likely to exit the Euro, the comment was made about Ireland's export led recovery. Bearing in mind the current unpleasantness directed at the Emerald Isle over its’ corporate tax rates and the fact all the major multinationals from Google, Mac, Amazon etc route all their profits through Ireland, thus dramatically "improving" the official numbers, I'd be grateful if anyone has seen any research on just how much the Irish economic recovery is a tax-driven sham? How much GDP has been distorted relative to what's actually made in Ireland? And how complicit has the government been in this illusion of robust Irish growth?
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Naahhh.. Looks just like the puke in gold last month.. A bit of a blow off bottom overnight.. Back inside 2% within a week
There you have it.
Crank the normalcy bias up one more notch.
If the bond market blew up, gold and silver would become arsewipe...
See I knew that Warren was wrong when he said gold had no purpose.
It's obviously a print globally till out of ink strategy for the bankers.
US REIT's are the biggest tell for the sham. I had thought their day was done in 2006 when I left the USSA.
They are still rocketing. Really says it all.
ori
3 words : General Growth Properties
stock price @ 666 '09 : 66 cents
stock price @ Beltane '13 : 22.66
3400 %
@tip e.... crazy isn't it?
all too predictable...in hindsight of course ;~)
Major ancient cultural kudos on the Beltane reference!
Rates below 2% in a week or two....if mortgage rates rise, it's all over. USA'll be competing with China and Spain for the largest Ghost Towns:
"More than 13,000 apartments were supposed to go up to create a mini-city for 30,000 people just 45 minutes outside of Madrid. But only 5,100 were built, many are uninhabited and regular Spaniards who bought them as investments are now competing to offload them for huge losses."
http://www.huffingtonpost.com/2012/02/16/spain-ghost-towns-real-estate-c...
http://www.news.com.au/business/china-building-mega-cities-but-they-rema...
http://www.dailymail.co.uk/news/article-2170886/Spains-ghost-airport-The...
Lloyds is selling those distressed assets because they have rallied massively. The only question is who wants to buy that shit now and hold the bag all over again?
I love how we will have 3% growth causing rates to rise and in effect pop bubbles all over the place....destroying growth. Funny feedback loop there,
whatthefuckever.
yeah no shit. "profit taking" seems to me. and i fail to see why Uncle Salami here won't just go right back to monetizing... on an even more massive scale under ye olde "what has your recovery done for anyone Wall Street" mantra. i mean running around on a "i love money" platform seems a rather odd electoral strategy...no matter what side of the political aisle you're on...given the fact that incomes are still lower, actual employment is at thirty years low. debt levels especially for students is at all time highs. fewer and fewer people are able to buy any of these ridiculously overpriced assets...even if they wanted to they couldn't. "hunger games goes global" here. it's amazing anyone is voting right now.
only empty bag i'll hold is the one for turbulent airspace, then discard back to shalom...
There is always a bigger fool or as PT Barnum used to say a sucker born every minute. A good snake oil salesman in a generally ignorant population mass is king since he is the one eyed man in the land of the blind.
I think we can catch up and pass their spending ways. We have The Bernank and The One and they don't!
Those bonds WILL be bought...even if its done at gunpoint
prease do not wolly.
Finally its getting interesting again. Bonds are blowing up and Austerity has been officially ended...
japan is the story of the year, hands down
everything that could go wrong over there is going wrong
Lolitop - Charting The Descent Of The Nikkei Index
http://chartistfriendfrompittsburgh.blogspot.com/2013/05/lolitop-chartin...
@realtick
Man, I clicked that link.
Take the kiddieporn somewhere else or at least warn of the itty bitty titty when you link.
FFS, some people!
10 yr. over 2.20 is the convexity issue Bruce mentioned over the weekend?
So Bill Gross was right?
Remove QE and the stock market tanks, along with yields collapsing once again:
http://advisorperspectives.com/dshort/charts/yields/snapshot.html?yields/SPX-10-yr-yield-and-fed-intervention.gif
Nothing has changed, bizarro theories notwithstanding. There will be flight to safety, regardless if the Fed and hedge funds want it or not.
I think this is just the Fed testing the waters....a shot across the bow for the future event..to see how much movement there really will be....they will use this % change in their calculations for future moves...
Yep, which is really just another form of manipulation.
the bernank finally got his wish, people are selling us treasurys. good job asshole!
and others are done selling (from some other site)
"Treasurys are no longer a sell, says Goldman, closing out its (highly profitable) short in the 10-year note this morning."
fonz/ doesn't this shit show long/short wear u down a tad?
yes it's awful. It really sucks.
rewatching sons of anarchy to get distracted tastefully:)
like watching endless ping pong match of back and forth money debt/creation with offsets of equel leverage and rehypoth and underlying assets leveraged and when short print some more and work it thru wall street till a drop or two gets to the thirsty plebs.
bruce nailed it - getting interesting, but never rule out uncle shalom, buyer of first and last resort.
1-2-3-4-5 trillion bal sheet - kaboom - the lid blows off...
Do not panic! The central planners have eveything under control! Consider this a buying opportunity as the Bernank will soon have rates suppressed to the levels he deems appropriate with inflation trends and risk. Now go back to your Cheetos and Dukes of Hazard reruns citizen.
ah. twinkies and leave it beaver, plez?
needs to be said: bitcheez
It’s amazing how many nine-sigma events we are having in just a few short years. We are either living in an age of miracles or the age of manipulations. I'd bet on the sun blowing up tomorrow before the first of those two possibilities.
What would Cramer do?
People need to start thinking outside the box when looking for yield. I still say short term treasuries 2yr or less are the best place to park money right now as far as paper goes if you are not looking for yield but principal preservation.
Yield is going to require short term risk in this environment and the only place with the best potential for that is investment in business and what I mean is small business not large tired entities but small hungry, looking for something to prove but have solid game plans built on fundamentals. I'll give you an example, I'd invest in small farming operations locally, why simple the food chain is never more than 3 days from breaking down with that said it is an investment in a basic commodity that everyone needs regardless if they system don't break down you still need food, local food keeps local dollars locally which in turns builds the businesses locally which in turn benefits you since you are a local also. If it does break down you can withstand the shock of the food supply chain being cut off. It benefits both ways and as a plus you can also do it as nonprofit and supply the food to local food banks if there is not public outlet to sell and work it from that angle to make money. It is a smart investment all around and the yield could be in money but if it is not there the yield is in infrastructure investment and in this case food a basic and universal necessity as it gets.
watching on my level 2, and from what it looks like now, it looks like this fucking sell off is nothing, and it will be green very soon, because the douchebag thieves in the fed and criminal bankers will keep make it green.
there is no real acceleration to down side, and the financials are already green somehow. cant make this shit up
Also people who think the stock market has performed better than the bond market well it depends on short term vs long concerning yield.
Over the past 10 years the bond market has actually given better yield overall than the stock market. I think the number is 5% a year average for bonds vs. 4.7% for stocks. You may scratch your head and go huh but most people forget the fact the stock market lost about 50% of market cap value in the 2008 crash when it finally bottomed out. It took a couple of years to recoup all those losses while bonds held steady and made positive gains the whole time even if depressed by QE. The fact of the matter is the bonds have been the turtle to the stock market hare. The experts can make all the cases they want otherwise but I suspect when they taper and the market finally pops bonds will stay ultimately stay at that slow and steady turtle rate or return. My point is short term bonds are not attractive except for principal preservation but long term at least historically long term they are for yield but I personally would only invest in short term paper and keep rolling it over.
The real issue facing the BoJ in the short to medium term is the 'time inconsistency' problem. Markets (and interest rates) react much more quickly than the underlying economy, i.e. growth, inflation, tax revenues and the prospect of reducing the government's debt (or at least its deficit).
http://nipponmarketblog.wordpress.com/2013/05/29/interest-rate-rises-and...
Death by Carry? No. Death by Bunga Bunga!!!
Hairy Carry! See poo? Coo'! (Verbogeny is for creatific thinkerizers!)
Analysis of COT Futures:
YEN:
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30 YEAR BOND:
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