Treasury Yield Curve Collapses At Fastest Pace In 7 Years

Tyler Durden's picture

In the last few months, the yield curve spread between 5Y Treasuries and 30Y has collapsed almost 80bps - this is the fastest relative drop since February 2007. The yield curve is down further today - at its flattest since September 2009. As BofAML's Macneil Curry warns, the flattenin trend is ongoing and sees medium-term targets down to 143bps (over 30bps below current levels) which would raise a number of eyebrows among the excuberant equity crowd (and the Spanish bond-buyers).



As BofAML notes,

Yesterday, we lowered our trailing stop on 5s30s to 182.3bps. Today, we recommend lowering it once again, to just above yesterday's high at 178.6bps. While the new 5yr has affected our chart in the near term, it does not alter the larger FLATTENING TREND. Initial downside targets are seen to 170.5bps/167.9bps (swing target and channel base), with medium-term targets seen to long-term retracement support at 143bps.

Back above 178.6bps would point to a bullish turn in the near-term trend.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
DoChenRollingBearing's picture

I wish I knew a lot more about interest rates & Treasuries.  I had thought for years that rates would go up.  

The Fed running ZIRP and our .gov spending stooges are ruining savings & capital formation.

Newsboy's picture

Nothing to see here.

Move along, now.

CrashisOptimistic's picture

Here is my 2 cents.

Food and gasoline is inflation.  And I know the gold wackos on ZH want to see the US Ts destroyed, but here is how the world works.  You see, that's not the kind of inflation that drives loans.  Only growth is.

Credit . . . loans . . . also are supply and demand related.  If there isn't much demand for a loan, you can't raise its price.  Its price is the yield or interest rate. 

If you see explosive economic growth coming, there would be lots of demand for loans and lenders will have pricing power.  Since lenders don't have that power and haven't been able to raise rates, THERE IS NO EXPLOSIVE GROWTH COMING.

Those guys rubbing their hands in glee at thoughts of a bond collapse are saying they see explosive growth coming.  That's the only thing that gives lenders pricnig power.

Is the Fed corrupting all this?  Yes.  But you have to decide something important.  Is the Fed all powerful, or not.  If you say, no, the Fed is not all powerful, then you are saying they can't hold rates down -- but either they have, or economic growth is shit.  You have to choose one or the other. If you think the Fed IS all powerful, then you can't ever have Treasury default.  They will stop such a thing via purchase.

The bond market usually gets it right.  And they say growth is shit.  I believe them.

Debugas's picture

i do agree - there is either no creditworthy borrowers and/or those creditworthy are not interested in taking loans

in either case banks can not help boosting lending

LawsofPhysics's picture

Allow me to simplify...

It's still a "debt-is-money" system, period.  All that matters is your full FAITH and credit...

In other words, no faith means no more credit for you...

tick tock motherfuckers...

Deathrips's picture

How does your analysis correlate with the late 70s and early 80s with 20%+ rates? Was there explosive growth expected on the war on drugs?





CrashisOptimistic's picture

Indexed union wage contracts.  Embedded systemic inflation in the system -- beyond food and gasoline.

With inflation systemically that high (and note GDP was not negative then), one could not lend money without the real rates reflecting inflation.

If food and gasoline price increases maintained themselves at 10% for 3-4 years, you would start to see real rates reflect that.  As is, oil has been flat for a few years.

But in general the answer to your question is Volker acted to destroy the union wage contracts that essentially defined national wages and were indexed to CPI.  They were a vicious cycle.  He undid that.

This spike is a big reason rates have been in decline for 30+ yrs.  Why would anything think that growth is to be so explosive NOW that the 30 year trend will end?

Deathrips's picture

Thanks for the answer.


Now there are only kabuki theater markets, not even close to real markets.


Guess we will all find out what happens when the feds fight the tide. 



g'kar's picture

I won't pretend to undestand all this financial stuff. Did the Dodd-Frank Act have anything to do with banks not lending into the economy? Why loan money to serfs when you can plow it into the stock market at ZIRP? Much better return I'd say.

DoChenRollingBearing's picture

Nice analysis Crash, I can think of nothing that refutes what you write.

LooseLee's picture

I agree that there is no growth and there will be no growth for a loooong time. However, what about the 'confidence' factor? If buyers (of gov't debt) lose faith in a country's ability to repay their debt, then they will sell (not buy) their holdings....

Cat Sniper's picture

This time is different. What could possibly go wrong? *Drinks*

Maroon Phoenix's picture

You can never ruin savings and capital formation. . . you just change the medium. Right now, gold and silver coin are most attractive for forming and hoarding.

Luckhasit's picture

Yea, well.  One, who the hell is still buying treasuries? Two, who in the world actually believe they are worth the paper they are printed on when they mature. 

And three, I have no idea what these charts mean.  I read the headline and input by Tyler but sometimes i feels like these financial guys are just trying to befuddle you with bullshit to cover the fact that predicting finances(sp) into the future is about as Ms. Cleo as you can get.

CrashisOptimistic's picture

The elderly (you know, the ones for whom compound interest has worked) are who is buying them.

They always have.  They always will.  Retirement advisors have always said "put your age in bonds".  If you're 70, 70% should be in bonds.  If 80, 80%.

The thinking is the old don't have time to recover from a stock market collapse, and so bonds is their foundation.

Al Huxley's picture

And they're funding the government with an incremental 600 billion - 1 trillion /year?  Lets say 80 million 'elderly' in the US - 600 billion/80 million means the elderly are funding the bond market by investing 7500/year in Treasuries, at a time in their life where typically the traditional model would have them gradually drawing DOWN principal and living as much as possible off the (now non-existent) interest.


The math doesn't support the hypothesis - it's the FED and their buddies at the ECB who are monetizing the US debt (and making the banks whole on their shitty sub-prime investments from 8 years ago), hanging the tab ultimately on the increasingly broke US taxpayer (unlikely) or the whole US population through default and currency collapse (unless they can monetize indefinitely and without consequence, which seems to be the implicit MSM assumption)

CrashisOptimistic's picture

Not quite.

They're in bond funds, of course.  They don't have to add incremental amounts.  The old amounts mature and roll over.  It's not new net additions.

But you have one point.  The elderly know their money "just has to last til I die", but if you ever talk to them about it, they do NOT want to ever decline.  They don't seek to die at zero.  They should, but they don't ever do that.  They want to keep growing their money every day of their lives.

It's actually a bit weird, but they are ALL like this.

Al Huxley's picture

The rollover funds the rollover of the existing debt, you still have to come up with the 600 billion - 1 trillion/year to cover the deficit.

CrashisOptimistic's picture

Sorry Al, and Fonz below, when articles scroll one just doesn't come back to comments.

600B sounds right for the deficit (CBO is looking for 490, that was one hell of a tax increase last year, plus the Sequester) -- and let's look at this.

The PDs buy that issuance, sell it to the Fed and they redeposit that Fed cash as excess reserves back at the Fed (splashed by Tyler months ago and missed by most -- utterly HUGE story).

Those bonds aren't in circulation.  Elderly don't have to buy them.  They buy past issuance -- or their bond funds do.

One thing I have particularly wondered about is the pricing of the Fed purchases from the PDs.  You know perfectly well the PD bids and buys from Treasury, and no way in hell they sell to the Fed at a lower price.  They sell at a higher price -- which clearly is yield depressive systemically.

So I just don't see the mechanism for long term rate rise.  Growth lack is against it.  Deficit monetization is against it.


fonzannoon's picture

The elderly and their bond funds are nothing in comparison to foreigners, who, even without Belgium, are clamoring for trasuries. Despite everything we read on here, there is huge demand for UST's. So I am more inclined to believe that the fed is fighting to keep yields up right now instead of keep them low. Food/energy/healthcare inflation is roasting the middle class who at the same time are watching their wages generally fall. So hyperinflation is out of the question. The fed has been fighting this with asset inflation but monetary policy has reached it's end point. Either we start contracting from an already shitty level and equities can't hide it anymore and people scramble into treasuries, or fiscal policy has to start getting some dough in the hands of the people, and they so far, have been afraid to do that, because they know where it goes from there.

yrbmegr's picture

I think they need to adjust the tax burden, in a revenue neutral way, to level the taxation of capital and labor.  I think that will start incrementally, but powerfully, putting money back into the middle class by not marginally penalizing labor versus capital through tax policy.

yrbmegr's picture

They want to leave money to their descendants.

ted41776's picture

quit being such racist conspiracy theorists

BadKiTTy's picture

Problem is DoChen my freind is that the whole thing is rigged! You cant understand if from the perspective of what should happen under free market rules, you have to look through the lens of manipulation.  

DoChenRollingBearing's picture

Well, that too.  

+ 1 for noting the markets are totally rigged.

SaulRosenberg's picture

I hope I'm not the first person to admit this, but I really don't know what this signifies. I guess I should know, but I don't and I'm gonna try reading more on it to see if it sinks in.

buzzsaw99's picture

borrow at zirp (pick currency of choice), buy stocks and bonds. simple really.

Al Huxley's picture

I would, but I'm not a PD or friend of Janet, so I don't get to borrow at ZIRP, I only get paid ZIP.

NotApplicable's picture

Long story short: All rates must be driven to zero in order for the existing regimes to keep up appearances, otherwise debt service costs will eventually consume ALL revenue as debt keeps piling up. (the ole pay off one credit-card with another gimmick)

The only way to prevent this is our friend ZIRP, which is an effort to reduce debt service costs to zero, allowing debt growth to go to infinity.

Of course, neither of these situations is a blessing, but as Mises said so long ago, (paraphrased) "There is no escape from a credit-fueled crack-up boom. Either the boom is allowed to go bust, or the currency will be destroyed."


yrbmegr's picture

It signifies that the taper is taking some steam out of the economy.

delivered's picture

Basically, a flattening yield curve tends to mean one of three things (when viewed from a classic economic perspective). First, future (10+ years) inflation expectations are limited or reduced. As the long-term yield decreases, this indicates the risk of losses due to purchasing power being eroded is anticipated to be lower. Second, future economie growth is anticipated to be lower or slower. Third, it could be that short-term rates are anticipated to increase (which on the surface is logical given comments made by the Fed recently but I really don't think is going to happen given the pressure the Fed is going to be under to keep rates as low as possible for as long as possible in order to avoid blowing up the economy).

Right now, the yield curve is flattening as a result of 30 yr rates decreasing from 3.92 to 3.47 this year with 5 year rates remaining basically the same (around 1.7 to 1.75). So the action appears to be in the 30 year area which would support a market that is concerned about falling inflation or even deflation taking hold. Either way, this is not considered a positive for future economic growth as in a strong economy, one would most likely see a healthy/relatively steep yield curve that continues to get steeper as economic growth accelerates. 

But what makes this analysis so difficult in today's environment is the fact that the world's CBs have distorted markets (from credit to equity to real estate) that it could be that "nervous" money is most likely trying to find any perceived risk free yield with about the only thing left being 30 yr treasuries. I believe the combination of real risks arising from deflationary forces/economic upheavel (e.g., China's credit markets imploding), the search for low risk yield, and geopolitical stress building around the globe are contributing to a less than rosey economic outlook. 

In any case, the flattening or worse yet, an inverted yield curve does not represent an optimistic vote for future economic growth and is something to watch closely as if it continues to flatten or invert, the credit markets are sending a message that some economic pain is going to be on the way.

LawsofPhysics's picture

never look back to predict the future (especially in a fucking casino where the "outcomes" are very well known).

See my post above regarding "credit".

Pareto's picture

normally delivered, i would agree with everything precisely as you have written it.  but, the way things are now, with the FED CLEARLY on at least a dozen occassions this month directly intervening into the stock market, bond market, shove it up your ass market, all bets are off on the significance of an inverted yield curve.  its more likely, all else equal, to produce the exact opposite effect of economic pain - mor elike more economic pleasure.  I still believe, for example, that the DOW will hit 20,000, and the SnP 2500 before there is any significant retreat - if ever.  but cheers to ya anyways for the cogent analysis.

alangreedspank's picture

When the end of the curve gets below the start of the curve as has happened in 2006, snap. Game over.

Yen Cross's picture

   Good for me. The usd/jpy hates higher U.S. yields... I guess everyone should hold off another year before they buy a house since yields are moving lower. Oh wait, they can't because the middle class is all penniless 1/2 timers just making ends meet.

DoChenRollingBearing's picture

Make your money while you can Yen!  I am not sure how long this can go on...  (Having written that, probably ZIRP4eva!)

Yen Cross's picture

    Stacked some more xag rounds last week Do Chen. Silver is on sale right now.

Thermopylae's picture

Speaking of "penniless" (copper), lets do a quck update on Mr. $29.99/mo. Gartman's stellar picks and see how they are doing.


Closed out his long copper (loser) at 3.0010   - now at 3.1205

Intiated long oil at 103.79     - now at 101.93

Went back into stocks 2 days  - pretty much flat


Brilliant!     (reminds me - time for a Guinness)


bondman1's picture

A couple of things are happening. Tax receipts are up and treasury issuance is down. The Fed is still buying long bonds. Intermediate treasuries are weak in anticipation of ZIRP ending in two years and Global capital finding a home in longer Treasuries as battle lines are being drawn before major world hostilities unfold. The flat curve will crush bank margins and reduce earnings and recession risks are beginning to mount. Otherwise it’s all good.

Rising Sun's picture

Let a fucking communist into the White House and this is what you get - ruinous actions like that of some nazi fuck in some don't care South American or African country.


This is fucking shit.  FUCK YOU FUCK YOU FUCK YOU FUCK YOU BARRY!!!!!!!!!!!!!!!!!!!

Wahooo's picture

Thanks a lot Tyler. If it weren't for ZH, we would have had a violent revolution by now and the banksters and fascists would be swinging from lamp posts.



HedgeAccordingly's picture

exactly. shit is not rosey