Pricing In The Taper

Tyler Durden's picture

Equity bulls remain cognitively biased to the belief that a rising interest rate market implies growth expectations (enough to warrant a Fed Taper) that confirm the hope priced into stocks (entirely missing the bubble concerns and technical corruptions in the markets caused by these policies). However, at the very short-end of the interest-rate curve in the US, the market has pulled forward rate-hike expectations from End-2015 to May 2015 in the last month alone. The problem with the velocity of this adjustment is that in order to hike rates - the entire extraordinary asset purchase program known as QE4EVA has to be over... Still think equities are pricing that in?


Here's the consensus...




The Fed Funds futures market has shifted notably...


And so have Bonds and the USD (shouldn't USD be higher in 'growth' is coming our way?) - but stocks remain a little umm - ignorant?


Charts: Barclays and Bloomberg

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SheepDog-One's picture

Joey BaLoney go feck yaself!

Chaffinch's picture

Off topic, but hey, TYLER, massive gold w/d from JPM yesterday, 217,000 ounces!

knukles's picture

The problem with equity managers is that their cognitive bias (world view) is for naught but rising equity prices.  A seriously delusional asset class of people. 

SAT 800's picture

Not alwalys. I actually knew one who wouldn't buy a stock if it was on fire; the story line is just salesmanship; it's internded for you, the "customer", (I hope not).

Pinto Currency's picture


Bond market looks to be telegraphing extreme volatility with potential for a run.

disabledvet's picture

i would argue that's been true in Europe for some time now. Japan had a solid GDP report which is the reason the dollar got slammed for Mr. Yen Cross out there. Also "Mr. Yen" was on the tele last night...for the simple reason that if they want to save Japan the Country from the Fukushima disaster they're going to need an uber-yen to do that...something they haven't had this year actually. Part of me says those JGB's are going to explode higher here though no matter what the dollar/yen does. Japan Inc. needs to diversify, diversify, diversify. I've already admitted to being greedy on the treasury trade...and i've gotten my burn notice once here. we'll see if i get a second or not. the only "tapering" i see is in growth...not in what the Fed is going to do or not. i think there's a lot of Crazy Talk going on...but honestly...the political situation is really volatile...seems an odd time for the Fed to suddenly do something...premature. we'll see. the safety trade is STILL treasuries in my view "until all this wilding comes into focus." US equities are NOT dependent AT ALL on what's going on globally...which in many ways is even worse news because internal demand is really total crap. i think you're going to get a MAJOR policy announcement on Syria soon...probably before the weekend. with the (some) chaos in Turkey i think the odds of an intervention go up not down. we'll see. interesting week so far. if you're really terrified move to Canada.

Pinto Currency's picture

Bernank The Magnificent thinks he has things under control but the daily parade of Goon-speak MOPE is causing an acceleration of the selloff in treasuries. What the heck is going on here?...

...The yield on the 10-year note is now up to 2.23%. That may not seem like much but, when you consider that not too long ago is was yielding near 1.40%, you realize that rates have moved up by more than 50% in the past 8 months. That's a lot. The acceleration in the decline since early May suggests only two possibilities:

  1. The discussion of a "Fed taper" isn't just's actually happening. Right here and right now. The reduced demand from The Fed leaves more sellers than buyers and bond prices are falling.
  2. The Fed has not begun to "taper" and is, instead, still directly monetizing $45B/month, augmented with the $40B/month in corporate welfare MBS purchases from the Primary Dealers. Selling by all of the other market participants is overwhelming The Fed's daily bid and driving prices lower.

Which is it? Well, here's a chart of The Fed's balance sheet from back in late January when Fed "assets" eclipsed $3T for the first time.

And in the five months since, the total has grown to $3.342T according to the latest weekly press release. ( Let's see...a little, quick back-of-the envelope math...$85B x 4 months = $ this $3.342T number looks about right.

So, if The Fed is still pumping out $85B/month, we can rule out #1 above. Hmmm...I guess that leaves us with #2 (no pun intended)...and this is where it gets interesting.

Even leaving out the $40B/month in MBS purchases, The Fed is still directly monetizing $45B/month in treasury debt. Regardless, in the past month alone, bond prices have fallen by 5 points and rates on the 10-year note have backed up from 1.6% to 2.2%. Jeez Louise! It's as if there is currently no other buyer of bonds in the U.S. Every other market participant is selling! They have to be in order to swamp and over-run the Fed's daily bid to this extent. So, who are these sellers?

Are they the dreaded "bond vigilantes"? Haven't heard that term for a while but do a quick Google search and you'll find plenty of new references.

Is it the Creditor Nations? Seeing the "QE? writing on the wall", are the Chinese and the Russians accelerating their divestment of treasuries?

Is it just everybody? The vigilantes, The Chinese, The Russians, the hedge funds, the pension funds..

Either way, ole Ben's got quite a problem on his hands. When you are the bid of last resort...when you are the market maker or specialist...the responsibility falls upon you to provide liquidity. You must be there to buy when everyone else is selling otherwise you risk a panic and a crash. Obviously, a tremendous amount of selling is currently taking place in the U.S. treasury market. At the same time, popular opinion and SPIN holds that The Fed is contemplating a "taper" of their bond purchases. OK, great. So instead of buying more bonds to support the market, The Fed is going to buy less? Seriously?? And someone thinks this is actually going to end well???

And this is what so many of us have been warning since overt QE began in 2009. Once The Fed decided to enter the market, they made themselves the "specialist", the buyer of last resort, and now they cannot exit...ever...without causing a catastrophic jump in interest rates. Think I'm crazy? Rates have moved from 1.6% to 2.2% (a 40% increase) in six weeks on simply the MOPE and SPIN of a "taper". Can you imagine the move if The Fed were to actually decrease their buying? At this point, they may be left with no choice but to increase their monthly purchases. Recall that that specific language was inserted into the latest FOMC minutes but hardly anyone seemed to notice. (

In the end, I'm simply not a believer that The Fed will soon "taper their asset purchases". How can they? Yes, 10-year note prices will likely fall even farther in the days and weeks ahead, dropping through 128 and heading toward 124-125. You can see it coming on the chart below:

At that point, I expect the MOPE to reverse. Some type of crisis will arise that will stem the selling of treasuries as "global investors seek the safe haven" of the U.S. dollar and U.S. treasuries. Maybe Europe will be shoved back to center stage? Perhaps war will finally break out in the Middle East? Something will happen to cause a return flight back into treasuries, of that you can be certain. However, if that effort then fails, The Bernank will be left with no choice but to increase QE, whether he wants to or not. Rates simply cannot and will not be allowed to move through 2.5%, toward 3% and beyond. The resultant economic slowdown will crush tax revenues and the rate increase will exacerbate debt service levels...a double whammy which would serve to rapidly accelerate the demise and unraveling of The Great Ponzi.

And, finally, this is where it gets really, really dangerous. If current holders of treasuries, treasury futures and treasury derivative contracts continue to sell regardless, the amount of QE needed to stem the tide and support the bond market will grow exponentially. This is where ole Ben is truly playing with fire. He may believe that he is all-seeing, all-knowing and all-powerful but...if the global market chooses to over-run him...panic, chaos and hyper-inflation will follow.

Still thinking about converting your physical metal back into fiat? I hope not.

slaughterer's picture

Rumor I heard at lunch: $5-10b/m taper announced next week at FOMC--just to test the waters.  Chose whether you want to believe it or not.  

Divided States of America's picture

No I started it but I use Verizon as my carrier so I think my rumor AINT a rumor no more.

derek_vineyard's picture

rates up, economy down........virtous circle...........japan part duex is well underway

SheepDog-One's picture

Only thing the Bernank can 'taper' is the end of a turd.

fonzannoon's picture

I remember when the only thing thig that used to be up when stawks were down were mining stocks.....sigh....

Colonel Klink's picture

I thought of something similar, but never posted it.  +1 for reading my mind and taking action.

Its Only Rock N Roll's picture

That would be like letting LEH go just to see how the market would take it...with the same results.  Then it would be like Fonz says "the toothpaste is out of the tube"


EclecticParrot's picture

Funny, I heard a rumor myself:  Bernanke will surprise everyone with an immediate retirement announcement at the next meeting, ostensibly for 'personal reasons', but wiill appear on Dancing With the Stars sometime before Labor Day, his resplendent beard converted to a devilish goatee.

(My source:  the UPS gal, she knows everything.)

CrashisOptimistic's picture

You do realize Q2 GDP projections are about 1.6%?  That's BEFORE Sequester furloughs have kicked in to the max in July.

Stoploss's picture

Well, can't say Ben isn't going to get his inflation now.

Because the next payment on our ever growing debt??  LOL!!!

That payment might have a little infltereatsion hidden in thar somwhar..

fomcy's picture

What tapering? FED will have to add more QE soon instead.

NoDebt's picture

Nice.  A straight-up double on yield expectations.

Let's all repeat after Dr. Krugman:  DEBTS AND DEFICITS DON'T MATTER.  (Unless you suddenly have to pay interest on them)

spine001's picture

Krugman should say (may be he does???) that Debts and Deficits don't matter for as long as you can produce enough cash flow to pay the interest they generate. Therefore, what really matters is the differential projects between no debt/no deficit/ no interest and debt / deficit / interes. To maximize productive projects all you can do from the monetary perspective is to minimize the expected return that an investor would request. For that you can only touch the risk free interest rate (that should be zero for the guy printing the money anyway) which today is around 3%, you can't touch the market premium since it is a 70 years average and fixed at 6%.

The mistake of Bernanke is that by not allowing the system to purge itself of the projects that were not producing anything of value by bailing them out, he created a huge anchor on everything else, therefore despite the biggest ever opportunity to start new projects, very few actually were started, which brings us to where we are today, with a lot of deficit, a lot of debt, a lot of interest, which is without any doubt a much worse situation than the baseline one of no deficit, no debt, no interest.

So, yes, he avoided the pain, but he forgot what I told him in 2007: "NO PAIN, NO GAIN". And here we are NO GAIN.

So without growth we can't afford the previous level of debt and deficit, much less the current one.

This is where Krugman is wrong. You can put as much gasoline into the engine but it won't start if the cylinder heads are open to the air. And without rational structural reform, in my analogy removing the anchor, we won't go anywhere except down very fast.

Until next time,


ghostfaceinvestah's picture

It's even worse than that.  Not only did Bernanke not let the system purge itself, his little bailout encourage even more malinvestment.  I see it every day, ridiculous paper-shuffling exercises that add no value to the economy but do a great job of concentrating risk.

SheepDog-One's picture

'Stawks'....the kid in the hockey helmet sitting on the short bus who left his lunch at home yelling 'YAY!'

SheepDog-One's picture

Cool info though, I did not realize the Fed funds rate was climbing so sharply. Free money not so free all of a sudden.

q99x2's picture

What's an "improving growth prospect?" That something akin to a green shoot?

Have you seen my ferret?

SheepDog-One's picture

No, but I like turtles.

Joe Sixpack's picture


"Have you seen my ferret?"

I think its up Bernanke's ass next to Turbo Timmy's gerbil.

FreeMktFisherMN's picture

low rates is the prerequisite to any of this stock levitation. They facilitate all the high margining on the NYSE and housing bubble.

bnbdnb's picture

Expectations are a bitch.

TheMayor's picture

No, and that is why we are now 85% in cash.

SheepDog-One's picture

The coma patient has been comatose on full life support for 5 years now....'that's a pretty long time', so the conventional wisdom surely he must be about ready to spring up from bed and win the NYC marathon.

(Baseless) 'Expectations'= insanity.

Bam_Man's picture

The thing these "perma-bull" yoyo's don't get is that all the Fed-induced liquidity in the markets cuts both ways. It can just as easily flip over to the short side - and probably will when the "big boyz" think the time is right. 

Dareconomics's picture

The financial markets hit an inflection point on May 2. The emerging markets have been affected the most.

SAT 800's picture

They might as well cut their throats while they're at it. Fucking useless idiots.

ghostfaceinvestah's picture

The mortgage industry is already getting hammered with this slight uptick in rate, lock volumes are way down, if this lasts, expect significant layoffs as pipelines are worked through, also expect the return of some crazy underwriting standards as originators scramble for volume.

mess nonster's picture

Let's see... equity bulls say QE taper and rate hikes indicate a return to permanent prosperity, and never-ending growth?

I think... QE taper means money dries up. I think a QE taper means velocity, already at turtle speed, stops dead in its tracks. QE is nothing more than the cociane needed by the coked-out monkey manning the pump below decks on the Titanic. At best, the monkey can keep up with the leakage, but only if he has a steady supply of cocaine. Taper the supply, and he get's cranky and tired, and we all knnow what happens then.

CrashisOptimistic's picture

That's not quite the right perspective, but almost.

The correct perspective is Bernanke chose to do this QE a month before the election, risking the independence of the Fed (had Romney won).  What made him so desperate that he took that risk?

Answer, Q4 GDP 0.4%.  The bounce in Q1 has been far below expectations (of 3%) with the latest rev 2.4%.

Q2 is projected at 1.6%, before the Sequester DoD furloughs start in July.  So Q3 may be 0.8%.

So the right perspective is WHAT THE HELL GOT BETTER SINCE OCTOBER?

What improved so that he doesn't need to keep doing what he did?

Answer: Nothing. So no taper.

MFLTucson's picture


SAT 800's picture

Not anyone that I ever met. This seems to be the 64 billion dollar question, tho.

ponzisaurus's picture

No one.  Not at 1% not at 10%.  When the fed stops buying the USA defaults.  So the question is does the fed want that?  Most would say no, me Im undecided.

monopoly's picture

There will be no taper, no reduction and as interest rates rise because of the currency wars now going on these useless idiots will just print more and moar. It cannot stop until the printing press is literally taken away from them. This is all they know.

Enough of this....less QE. Never going to happen voluntarily. They can't. Markets will crash before breakfast.

Tired of hearing "we are going to exit" for the last four fucking years.

CrashisOptimistic's picture

The markets don't decide it.  GDP does, and it says no taper.

Clowns on Acid's picture

Flattening of yield curve should be great for bank stocks right ? 

max2205's picture

Why isn't my money market paying 1%?....thanks Benfuckface

SAT 800's picture

Get out of your money market before the Govt. confisticates it.

taketheredpill's picture

$ and Treasury prices tend to run higher when SPX craps out.  That was why is was fun watching $ and equities gain at the same time, feeling was SPX would correct down.  At least that was what used to be "normal".  Now, who knows.  Suspect $ weakness is linked to JPY strength rather than anything else.  LQD closes right on long-term support but HYG has already broken and should leak lower until f-gates open (hopefully).  Think lots and lots of people bought HYG because "it's High Yield but because it's large and liquid you don't need to do credit work because it's a sector bet...just sell when (if ever!) the sector turns down".  I think the problem will be that the people who sell early are the ones who sold last year or even earlier...