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Scotiabank Warns "Treasuries Will Have A Difficult Time Going Down A Lot In The Near-Term"

Tyler Durden's picture





 

Via Guy Haselmann of Scotiabank,

Good Morning,

I went to a meeting last night hosted by the University of Chicago called “Economic Outlook 2014”.   The panelists leading the discussion were Austan Goolsbee, Randall Kroszner, and Carl Tannebaum.   I will not go into the obvious, or things discussed in my notes, but rather a few things that I learned.

First some background.  Internally we have been forced to discussed pressures in Emerging Markets.   The challenges are great – yet many countries until recently have had isolated troubles.  Capital outflows, current account deficits and sinking currencies are one of the common themes.  The questions for us – i.e. players in the Treasury Market – is how will those stresses effect Treasury prices or impact the Fed who is expected to taper by $10BB at each meeting in 2014.  

On the one hand and in a stable state, tapering should lead to a gradual ‘normalization’ of yield levels – which mean that the 10 year should (assuming no crisis) ‘gradually’ trades toward nominal GDP minus some liquidity premium.   However, I’ve mentioned in earlier notes that should concerns build that global growth and inflationary expectations begin to drop too much (either due to Fed Taper or Geo-events), then Treasury values will recalibrate and yields could drop precipitously 2.5%.  If things got really bad, yields could fall quite a bit further.  We don’t seem to be in this latter position - quite yet.

While the situations in Turkey, Ukraine, South Africa, Brazil, Argentina, India, Indonesia, Thailand, Syria, etc. are signification to those countries, their problems for the most part have until recently been contained.  However, pressures are building and many of their central banks have been forced to raise rates meaningfully to combat capital outflow, and currency drops that have aggressively spiked domestic inflation rates.  It is assumed that hiking rates to fight inflation will build their credibility.  However, these large rate hikes will cause domestic growth damage: combined with the drop in their currencies, markets are beginning to lower expectations for demand coming out of these countries….less demand, then less growth and downward price pressures.

The biggest issue of all, but unfortunately the most uncertain as well, is with the Chinese Trust products.   As I mentioned, $660 Billion of this product comes due this year.  Investors who had purchased them in the past now know that they are indeed NOT a guaranteed product.   Rates in China will have to rise to compensate the newly found investor caution toward these products.  In turn, growth will slow as credit will slow; and employment will slow and wages with it.  

Slowing demand from China will further hurt EM suppliers of materials, thus fueling EM challenges.  The result is causing global growth and inflation expectations to fall.  China is best positioned to limit the damage.  Yet, are they willing to write a check for all these products many of whom could default?  China has a closed capital account and many ways to deal with problems.  But they could lose control of the process – Beijing’s number one fear is social unrest that could grow.

Back to the U of C meeting last night.   Carl Tannebaum  made an interesting point last night.  He said the US fiscal deficit is falling far faster than anyone had forecast and there are many perplexing reasons why this is the case.  The main reason, according to the CBO, is that Health Care costs are dropping much more than anyone expected.  This is the result of generic drugs, better medical device efficiencies and a few other less dramatic reasons.   The point here is that this is causing downward pressure on inflation and a material fiscal deficit drop.  Both of these factors in the short-term are positive for Treasury PRICES.  In fact, Carl said that the drop in HC costs is so dramatic that should it be maintained for the balance of the year, that the Deficit Reduction would equate to 90% of what Simpson- Bowles was meant to accomplish.

As far as the Fed,  I believe there is an infinitesimal chance that the Fed pauses from tapering today.  The greatest outcome - a very high probability - is that they taper by another $10BB.  However, there is a small chance that they announce a $10 BB taper for February and another $10BB taper for March.   This is because the next Fed meeting is not until March 19th.   The chances of this occurring is quite small particularly after the lousy employment report earlier this month and yesterday’s lousy durables report.  However, maybe they can blame those on the weather.

There are many members who would like to exit as soon as possible, so a monthly $10bb is possibly.  

On the other hand (again), the markets might interpret  this as an acceleration in the pace, so the market could then price in an earlier hike in rates.  This is because the Fed has tied the first hike to a 6-month (or so) period after QE ends (i.e. earlier end to QE, earlier hike).   The market in this scenario - and because of the current global situation - might have a perverse reaction in that risk assets might get smoked, and growth and inflation expectations might fall even further, and so after a brief dip in Treasuries, they would surge higher in price.

In the meantime, Treasuries will have a difficult time going down a lot in the near term; such would need both the EM situation and equity market heaviness to stabilize.

 


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Wed, 01/29/2014 - 14:04 | Link to Comment buzzsaw99
buzzsaw99's picture

they know nothing! [/jim cramer]

Wed, 01/29/2014 - 14:12 | Link to Comment knukles
knukles's picture

I got some good news and some bad news.
The bad/good news is that things are shitty
The good/bad news is that rates could fall a lot more if they get even shittier.

How shitty is shitty?
When you need to change your pants, is shitty.
Some folks are gonna need multiple changes.

Wed, 01/29/2014 - 14:34 | Link to Comment TheCanadianAustrian
TheCanadianAustrian's picture

Wait, are they saying treasuries will remain high in the short term, and then go down? Or did they leave out a comma?

"a difficult time going down"

vs

"a difficult time, going down"

Wed, 01/29/2014 - 14:40 | Link to Comment john39
john39's picture

ever hear of a herion addict gradually tapering off the habit, without any major issues?  me either.

Wed, 01/29/2014 - 14:43 | Link to Comment SAT 800
SAT 800's picture

Ive heard about it; but I don't believe it; no.

Wed, 01/29/2014 - 14:34 | Link to Comment Occident Mortal
Occident Mortal's picture

Before 2008, FX markets used to be a lot more volatile.

This recent action is the first time since 2008 that we have seen Central Banks losing control of their markets.

Wed, 01/29/2014 - 14:41 | Link to Comment SAT 800
SAT 800's picture

many countries have troubles, but until recently, they have been isolated.--" that's the part that's nervous making. contagion. it's a world wide recession, (at best), with a lot of make-up on, trying to pretend it's young and vigorous. The routine is getting old; when too many people check out the list of distressed economies/currencies/banking systems, and come to the same coclusion; then we could have a lot of shitty pants.

Wed, 01/29/2014 - 14:49 | Link to Comment eclectic syncretist
eclectic syncretist's picture

A reasonable hypothesis is that the heaviest flows of money will be out of equities and currencies into the perceived safe-haven of bonds, with some leakover into PMs, which are the ultimate safe-haven (although many have forgotten this over the past decades).  Then, once that process has run it's course, the lack of safety in bonds will become apparent and flows into PMs will become huge.  This would be over the course of the next few years unless a catalyst accelerates the process.

Wed, 01/29/2014 - 14:57 | Link to Comment SAT 800
SAT 800's picture

that's exactly my opinion; so at least there's two of us. Maybe more? who knows. I look at it as a river of hot capital with a little offshoot creek, called "gold creek", (which of course includes my favorite, Silver Trickle); and I would suppose more and more people would get interested in the no-counterparty thing; as more and more counterparties are seen to have "problems".

Wed, 01/29/2014 - 15:14 | Link to Comment Panem et Circus
Panem et Circus's picture

I agree with the exception that I think most of the pouring into PMs will be of the paper variety.

Wed, 01/29/2014 - 14:54 | Link to Comment SAT 800
SAT 800's picture

ScotiaBank is very stable and well-financed, like almost all Canadian Banks, and they have a sub-division that actually smelts and pours the silver and gold bullion bars; so I have a big warm place in my heart for them; but I don't think they're on anybodies list of great intellectuals.

Wed, 01/29/2014 - 14:05 | Link to Comment fonzannoon
fonzannoon's picture

"The main reason, according to the CBO, is that Health Care costs are dropping much more than anyone expected. "

 

What in the fuck is this guy smoking?

Wed, 01/29/2014 - 14:07 | Link to Comment Bearwagon
Bearwagon's picture

Who cares what it is?! I want some of that stuff!

Wed, 01/29/2014 - 14:17 | Link to Comment knukles
knukles's picture

Actually, it's true.

So many people are loosing their coverage and either not able to replace it or just quit caring that costs are dropping
Kinda
Sorta like gas tax revenues are down because so many folks are driving electric cars.

 

The truth is that health care costs are rising so fucking much that Ma and Pa Kettle in Dubuque Iowa are starting to eat a half can of cat food a day, down from 3/4s

Aaarrgah.....

Wed, 01/29/2014 - 14:19 | Link to Comment fonzannoon
fonzannoon's picture

Ah yes...thank you knuks...Barflation....how could I forget...

Wed, 01/29/2014 - 14:49 | Link to Comment eclectic syncretist
eclectic syncretist's picture

Nobody goes there anymore, it's too crowded.  YB

Wed, 01/29/2014 - 14:28 | Link to Comment lakecity55
lakecity55's picture

Knux, we will all be eating cat food soon, although I prefer Mighty Dog myself.

Wed, 01/29/2014 - 14:45 | Link to Comment The Wisp
The Wisp's picture

American's are starving.. there fore, Americans are spending Less On Food..  Hurray..!

  make perfect sense

Wed, 01/29/2014 - 14:14 | Link to Comment johnQpublic
johnQpublic's picture

healthcare costs are dropping because there are bout 4.2 million less people with healthcare coverage than before and therefor lower costs

 

ta-da

Wed, 01/29/2014 - 14:17 | Link to Comment maskone909
maskone909's picture

just because they dont have coverage doesnt mean that hospitals arnt providing the treatments.  funny thing about sick people, they dont go away.  and with a growing aging population, its only going to get worse.  what i am having a hard time understanding is how this is going to effect inflation?

Wed, 01/29/2014 - 14:31 | Link to Comment maskone909
maskone909's picture

This article, if you read between the lines, is a lament to obammaCare.  The ivey league Economist propagandists are going to take this and run with it.  They will be blamming the lack of subscribers to obammaCare for the "failure" to get inflation moving.  This is a total diversion from the true causative factors problematic to our "economy".  This "Guy" wants to connect lack of healthcare subscribers to the decline of inflation.  Perhapse he will also claim that deflation is americas worst enemy.

Wed, 01/29/2014 - 15:54 | Link to Comment SDShack
SDShack's picture

0zer0care spin control gives the following explanation: More people losing HC means no HC premiums being paid, so more disposable income to spend on iShit. This all works until, like you say, they get sick or injured and have to go to the doctor. Now the option is spend your own money (all gone because you had to have iShit), go on Medicaid, or enter the emergency room and just don't pay the bill. Almost all will simply choose the latter. The worst that can happen is bankruptcy, you lose your home, etc. Course if you have no home, no job, etc, then you just become a member of the FSA. It's all bullish for the 0zer0 state.

Wed, 01/29/2014 - 16:19 | Link to Comment tip e. canoe
tip e. canoe's picture

iShit is so 2012.

MyRA is the new iShit.

Wed, 01/29/2014 - 14:16 | Link to Comment lakecity55
lakecity55's picture

Caught my eye right off.

Wed, 01/29/2014 - 14:18 | Link to Comment knukles
knukles's picture

Quick.
Put it back in before you can't see it!

Wed, 01/29/2014 - 14:18 | Link to Comment lakecity55
lakecity55's picture

Haha, I thought O-BONDS were gonna fix these problems.

Wed, 01/29/2014 - 14:27 | Link to Comment knukles
knukles's picture

Do they come with "vision" coverage?

oh Jesus, how many circles within circles in that one....
Once there were Brady Bonds
Then there was Barry Bonds
Now there're Obie Bonds

Alice in Chains in Wonderland for fuck's sake.
Madness,
Simply madness

 

So here's the question before the house.
Mr X works for Company Tightwad and Tightwad & Co., offer no 401(k)
So that means Mr X goes off and opens a MyIra (Sounds phonetically like some alien anal probe, or is that just me?) just like he coulda opened an IRA or a Roth Ira.
In which he could buy... ta dah!... Treasuries!
Right?
So what's the fucking difference?

Wed, 01/29/2014 - 14:29 | Link to Comment fonzannoon
fonzannoon's picture

I've been asking this question for 2 days. Apparently he can buy them direct from .gov cutting out a middle man...but unless Mr. X gets primary dealer status I just don't see what the fuss is about...

Wed, 01/29/2014 - 15:29 | Link to Comment Panem et Circus
Panem et Circus's picture

Because IRA and Roth IRA were passed through legislation, and this egotistical ass wants to be able to take full credit for this one?

Wed, 01/29/2014 - 14:45 | Link to Comment SAT 800
SAT 800's picture

Don't feel bad; the EURO still sounds to me like some kind of pee disease. When I first heard about it; I laughed ouit loud, and said, naw, that can't be right. but it's a strange fucking world.

Wed, 01/29/2014 - 14:16 | Link to Comment El Vaquero
El Vaquero's picture

He's smoking horse shit.  High grade horse shit, and he'd like to have a go at exhaling the resulting smoke into the anus of every man, woman and child on the planet.

 

The real reason the deficit fell:  Months of "extraordinary measures," i.e. cooking the books to make it appear that we weren't spending on a deficit while we really were.  Then, the 2013FY ended on Oct 1, then .gov "shut down," the debt ceiling was lifted, and BAM!  over $300 billion of deficit spending was offloaded onto FY 2014. 

 

Well, Obama is going to have a fun time explaining not only the increased HHS costs for this fiscal year, but also that added $300 billion from last year.  Too bad the fiscal year ends before the November elections.

Wed, 01/29/2014 - 14:19 | Link to Comment knukles
knukles's picture

Willy "the Pecker" Clinton never inhaled
Obie "the Messiah" never exhaled
And here I am with no dope

Crystal clear insights
And deeply saddened by the Great Travesty

Wed, 01/29/2014 - 14:27 | Link to Comment Jonas Parker
Jonas Parker's picture

Yup! All the dopes are in Washington DC!

Wed, 01/29/2014 - 14:08 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Ah yes, I see that the paper-pushers want to suspend gravity again.  Good luck with that dipshits.

Wed, 01/29/2014 - 14:13 | Link to Comment Winston Churchill
Winston Churchill's picture

Don't know there LoP.

Loking at GOFO ,and the action in reverse repos we could see negative rates

before an explosion to the upside.

All in this year I might add.

Wed, 01/29/2014 - 14:58 | Link to Comment LawsofPhysics
LawsofPhysics's picture

I am sure we will see negative rates.  When we do, you better be in a safe place, because after that many things will be "exploding".

Wed, 01/29/2014 - 15:30 | Link to Comment Panem et Circus
Panem et Circus's picture

It's effectively a negative rate if the government literally forces you to lend it to them.

Wed, 01/29/2014 - 14:19 | Link to Comment El Vaquero
El Vaquero's picture

Cartoon physics is what it is.  Until real physics catches up with them anyway.  Ever increasing entropy is a bitch.

Wed, 01/29/2014 - 14:10 | Link to Comment Martin Silenus
Martin Silenus's picture

One thing that always amazes me is how a politician, when faced with indisputable facts contrary to what they've said, can blithely continue lying right in your face.  Takes a special kind of hubris to do that.

Wed, 01/29/2014 - 15:54 | Link to Comment SDShack
SDShack's picture

Learn the definition of a sociopath, and you won't be amazed anymore.

Wed, 01/29/2014 - 14:11 | Link to Comment Hedgetard55
Hedgetard55's picture

Treasuries may have trouble going down, but not Bathhouse, or Shrillary.

Wed, 01/29/2014 - 14:20 | Link to Comment knukles
knukles's picture

It's such a gay life....

Wed, 01/29/2014 - 14:23 | Link to Comment ebworthen
ebworthen's picture

"What difference does it make, four people are dead!" and crocodile tears just like Hubby at Ron Brown's funeral.

Wed, 01/29/2014 - 14:11 | Link to Comment taketheredpill
taketheredpill's picture

 

If the Fed dumps $10B Treasuries on the market then yields will rise, ALL ELSE EQUAL.

BUT All Else is NOT Equal.  Unless organic sustainable growth appears out of nowhere to support the recovery that wasn't, then stocks drop.  A lot.  And suddenly a positive return on Treasuries looks attractive.

At least until the next Fed experiment anyway.

 

 

 

 

Wed, 01/29/2014 - 15:32 | Link to Comment Panem et Circus
Panem et Circus's picture

Until default

Wed, 01/29/2014 - 14:14 | Link to Comment thunderchief
thunderchief's picture

Bonds will be fed short term by falling stocks and banks.

Count on the propaganda financial news screaming "safe haven"

After that it's myra's and confiscation.

Wed, 01/29/2014 - 14:15 | Link to Comment Slamshizzlestein
Slamshizzlestein's picture

I like this guy

Wed, 01/29/2014 - 14:15 | Link to Comment Hugh G Rection
Hugh G Rection's picture

Who else was super excited to hear about Obummer's MyRA plan last night!  We can save tax free in Government Treasuries!! Badass!!!!

Cause they would never loot the pensions right?

Wed, 01/29/2014 - 14:16 | Link to Comment q99x2
q99x2's picture

Guy go Hasel some other man back in Scotia to BTFD with all your shoulds and coulds. We all know that if if's were fifths we'd all be drunk around here. And, don't tlet the door hit you in the ass on the way out. Go on . Get out a here.

Wed, 01/29/2014 - 14:17 | Link to Comment i_call_you_my_base
i_call_you_my_base's picture

Nonsense, just induce a flight to safety.

Wed, 01/29/2014 - 14:17 | Link to Comment ebworthen
ebworthen's picture

Short version:  Central Bank rate jiggering and QE has fucked over world economies along with individuals and households.  The shenanigans will continue.

Wed, 01/29/2014 - 14:21 | Link to Comment Bunga Bunga
Bunga Bunga's picture

Get all your nesteggs into a MyRA now!

Wed, 01/29/2014 - 14:20 | Link to Comment ATM
ATM's picture

Rates aren't going up because they cannot allow rates to go up. The "economy" is the housing market. 50% of the entire US economy is tied directly to housing. Rates have gone up marginally and housing is tanking again. 

Higher rates also means the Fed busget deficit goes up exponentially as rates rise. 

Rates have to be drivien down to get the fake economy moving, and driven down to keep the fake government afloat.

They can manipulate rates so they will manipulate rates. Higher rates are not good for the central planners so do the fucking math.

Rates are not going up and they are most likely going down.

Wed, 01/29/2014 - 15:03 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Unfortunately for them, the very real commodities that are required to maintain the status quo and stave off the guillotines will experience massive inflation should CBs around the earth decide to do this again.  Should the fed taper all the way back to zero QE, those that matter will be safely in their bunkers or on their private islands.  Hedge accordingly.

Wed, 01/29/2014 - 14:23 | Link to Comment lakecity55
lakecity55's picture

"Hey, Barry here for ShamBonds!TM  Got rouble in emerging markets? Liquidity issues? Shambonds and O-Bonds its cousin, will solve your problem! Call1800BARRYFDME for your free introductory offer!"

Wed, 01/29/2014 - 14:48 | Link to Comment SAT 800
SAT 800's picture

former community organizer; now an international Bond Expert; call 1-800-SUCKME; for a free estimate.

Wed, 01/29/2014 - 14:23 | Link to Comment disabledvet
disabledvet's picture

Turkey can't afford those interest rates.
Neither can South Africa.
This is a reprise of the Latin American debt crisis.
"Our default, your problem."

The bulk if not totality of the global would sure appear to be on European Banks...why else bail out Dexia? (Which needed..and did get further and massive bailouts from the EU.)

Right now the Fed appears to have discovered the "secrets to self levitation."

I think they will Taper...maybe even accelerate the unwind. What's going on in the EM'a is not their fault...nor at least to date does it seem to be their risk. There's always a cockroach or two of course.

Right now that wouldn't appear to be on corporate balance sheets...even with the worst recovery in the post war era.

Deflation is an impossibility here.
That doesn't mean internet rates don't drop to one percent though.
This country did have a Great Depression...and does not have any labor law to speak of...let alone the. German variant which is "top shelf" as they say.

Wed, 01/29/2014 - 15:05 | Link to Comment LawsofPhysics
LawsofPhysics's picture

"There's always a cockroach or two of course." - Bullshit, there is never just one or two.

Wed, 01/29/2014 - 14:34 | Link to Comment youngman
youngman's picture

Funny how he thinks Treasuries are the only game in town....dont forget about your friendly PMs...not connected to any one countries fiat....good all over the world

Wed, 01/29/2014 - 14:50 | Link to Comment SAT 800
SAT 800's picture

They'll get there. you have to remember what IQ100 really means; it means they can remember how to tie their shoes and their phone number; beyond that, it's all luck.

Wed, 01/29/2014 - 14:57 | Link to Comment Drifter
Drifter's picture

Treasuries won't go down, but the dollar will.

Wed, 01/29/2014 - 15:05 | Link to Comment LawsofPhysics
LawsofPhysics's picture

Think bigger - "soveriegn debt won't go down, all fiat will."

Wed, 01/29/2014 - 22:17 | Link to Comment David Wooten
David Wooten's picture

"Treasuries won't go down, but the dollar will."

Dollar down? Against what?

Wed, 01/29/2014 - 15:11 | Link to Comment Downtoolong
Downtoolong's picture

In the meantime, Treasuries will have a difficult time going down a lot in the near term.

This implies some sort of natural market forces are at play. What a crock of Bankster softspeak. Why not say it like it really is, “The Central Banks will step in if they deem it necessary and manipulate markets even more than they already do.”

Wed, 01/29/2014 - 15:41 | Link to Comment Kirk2NCC1701
Kirk2NCC1701's picture

The BRICs + EMs (Emerging Markets) need to dump the Dollar... NOW!

Or they'll get what's coming to them:  A real whoopin'.

So you can't say I didn't warn you or provide SMART* solutions, you must...

Back your national currencies with

   (a) PMs (mix of Platinum, Gold, Palladium and Silver), and

   (b) Exportable Energies (Carbon-fuels or Electricity).

If you have a healthy mix of these, short of starting WW3, there is NO way the Fed-led CBs can mess with you.  In fact, if you did these things, THEY would be the ones with bank runs, starting the same day. 

The BRICs can lead the way, and the EMs would follow in short order (starting with S. Africa, Argentina, Chile, Turkey).

I think you got the brains.  But do you have the balls?

* Specific, Measurable, Actionable, Relevant, Timely

Kirk out.

Wed, 01/29/2014 - 22:15 | Link to Comment David Wooten
David Wooten's picture

Long term Treasuries are likely headed up - yields down - if world markets continue to crash.  Flight to 'quality'.

Do NOT follow this link or you will be banned from the site!