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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buzzsaw99's picture

they know nothing! [/jim cramer]

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.

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"


"a difficult time, going down"

john39's picture

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

SAT 800's picture

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

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.

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.

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.

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".

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.

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.

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?

Bearwagon's picture

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

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
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


fonzannoon's picture

Ah yes...thank you could I forget...

eclectic syncretist's picture

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

lakecity55's picture

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

The Wisp's picture

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

  make perfect sense

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



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?

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.

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.

tip e. canoe's picture

iShit is so 2012.

MyRA is the new iShit.

knukles's picture

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

lakecity55's picture

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

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.
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!
So what's the fucking difference?

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...

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?

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.

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.

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

Jonas Parker's picture

Yup! All the dopes are in Washington DC!

LawsofPhysics's picture

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

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.

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".

Panem et Circus's picture

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

El Vaquero's picture

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

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.

SDShack's picture

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

Hedgetard55's picture

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

knukles's picture

It's such a gay life....

ebworthen's picture

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

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.





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.

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?

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.

i_call_you_my_base's picture

Nonsense, just induce a flight to safety.