Coiling, Complacency, And The "Three" Coupon Treasury Markets

Tyler Durden's picture

Via Guy Haselmann of Scotiabank,

On the Cusp of Breaking the Ranges!?

On a closing price basis, the trading range for the US 10 year note since January 24th has been 22 basis points which is the narrowest in that length of time in over 30 years.

The FT reported today that the 7% range in the dollar over the past two years is the narrowest over that length of time since late 1977.

Despite huge intraday volatility in Q1 in various single name equities and sectors, the FT also says the trading ranges for broad market equity indices this year have been the narrowest in over a decade.

Often times, narrow trading ranges act like coiled springs.  The longer markets stay in those ranges the greater the pressure builds.  Tight ranges over longer time periods cause ever-more-powerful movements once the ranges break.

Over the next two weeks, there are multitudes of events and economic data which could set the tone of trading for the next several months and potentially provide the catalyst necessary for markets to break out of ranges.

A vast amount of important US economic data burdens the calendar the balance of the week.


There are also month end influences;


an FOMC meeting and Bernanke speech tomorrow;


and, ECB, BoE, and RBA meetings next week.


Holidays in Europe and Asia this week could further exacerbate poor market liquidity and serve to magnify price movements.

There are several factors contributing to market complacency:

Share buybacks help fuel a relentless stock market bid (buybacks totaled 6% of 2013 market cap).  Higher stock prices create the perception that all is well.


The VIX (measurement of future volatility) is historically low, but reasons for its low level have turned it into a misleading fear gauge.  Fed policy now implicitly provides the market protective puts.  Furthermore, the Fed’s ZIRP (zero interest rate policy) makes investors so starved for any yield enhancement strategies that they are incentivized to sell options (a decaying asset).


The ECB’s LTRO plan (long-term refinancing operations) offered ‘free money’ to banks which was used to buy the higher-yielding debt of their own countries.  The program helped to collapse sovereign debt spreads and create the illusion that all was well in Europe.  (Basel assigns a zero risk weighting to a bank that owns the debt of its own country).

We should know soon which direction the coiling markets intend to breakout. I have offered over the past several weeks a litany of reasons why now is the correct moment (timing) for equities to have a sizable correction (down), and the long end of the Treasury market to break out (lower yields and big curve flattener).   I maintain that viewpoint.  I will not go into those reasons again, but rather offer one new insight.

The strength in the S&P 500 - which is only 1% off of all-time high levels and up 1.7% YTD - may not be as strong below the surface as it appears.  It seems to me that defensive stocks have powered the overall market forward.  Utilities (UTY) and consumer staples (XLP) are breaking out and leading broader averages higher.  These sectors, however, are considered bond-like stocks, so maybe it should be considered a bond (not stock) breakout.  I consider this defensive-type of sector rotation to be a warning signal and an indication of investor desire to de-risk. (After all, QE encourages risk, while the end of QE should do the opposite).

The Three Coupon Treasury Markets

It could be wise to begin thinking of the Treasury curve as three separate markets.  The long end has commodity characteristics.  (In my March 28th note, I outlined the reasoning why there could be supply shortages in long-dated Treasuries due to demand from Corporate Pension plans.)  The front end is driven by changing expectations on the timing and magnitude of future FOMC interest rate increases.  The ‘belly’ of the curve is caught in the crossfire, being pushed and pulled by the wings.

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Sutton's picture

cool stuff.  Thanks,ZH

HedgeAccordingly's picture

war pre-premium and also general profit taking post 2013 bull run keeping bond prices lofty.

Roubini on war.

CrashisOptimistic's picture

"The front end is driven by changing expectations on the timing and magnitude of future FOMC interest rate increases. "

Fuck off, Scotiabank, with your economic-growth-is-inevitable-and-soon narrative.

fonzannoon's picture

I hear you crash. But I think that this front end move is the fed trying to convince everyone it is serious. It is being met by the long end collapsing, which is everyone calling bullshit on them.

fonzannoon's picture

This is a good read, especially from Hasselhoff. Treasuries are being bid massively right now by both foreigners and domestic entities. That is why the Fed can taper, there is a shit ton of buyers everywhere. The fed has to be starting to shit their pants over this, as it does not take too much for us to go full out Japan.

NoDebt's picture

Which is, as I have been saying, where this is headed.  A Japan scenario is the ONLY scenario that doesn't involve a lot of pain for a lot of groups.  They're not soiling their pants, this is their GOAL.  Their least-ugly policy end point.

Surely by now even the Fed, slow-witted though they may be, realize that growth isn't going to result from their actions, nor are actions on any other front (fiscal, private sector) on the horizon, either.  Without growth, interest rates have little upward pressure.  And given our massive and ever-growing government (entitlement) debt, low interest rates are REQUIRED to prevent the whole thing from sliding right off the table.  

Not pretty, but stable.  And they know this.  They're breathing a huge sigh of RELIEF over this.

fonzannoon's picture

I'm with you sort of. I don't think they are breathing a sigh of relief over it. I think it scares them half to death actually. Although I am inclined to agree that this may ultimately be where we are heading. I almost think they would rather lose control of velocity the other way. If we go towards Nirp it will be like being in a submarine heading towards the bottom of the ocean. The wealth effect goes out the window and the pension funds start imploding as they can't get the desired returns. On top of that, fat americans with guns are not the docile herbivores that the Japanese are. It will be ugly.

NoDebt's picture

The fly in the ointment is that with zirp or nirp the gubmint (and other large entities) can borrow almost ENDLESSLY to cover the nominal cost of those entitlements, even pensions to some degree.  Everyone wins on the nominal, while blindly losing ground in the real.  

The only ones who can directly feel their loss are savers, who witness their lack of returns with every quarterly statement.  But they're easy to handle- you just keep them peeing down their leg with fear of huge losses always foremost in mind and they'll keep swallowing those repressed returns until the cows come home (or sheep).  In fact, tthey'll LOVE big brother for protecting them.  Besides, there ain't that many savers to worry about anyway.

"I think I should be earning a high interest rate on my money" doesn't exactly have the same resonance as "I was promised!"

I guess the point I'm trying to get to here, really, is that this isn't some future event.  We're IN IT NOW.  And it will continue to go on until such time as the baby boomers start to die in numbers and the demographics change.  After that my crystal ball gets a bit foggier.  I doubt it will get better quickly.  We will then be relying on the "lost generation" of today's basement-dwellers to magically pick up the slack and carry us forward to a brighter future?  I dunno how well that's going to work out.  No easy answers.

Look around the US, Europe and Japan.  You can already see it happening, everything I said above, although the ovrall trajectory sometimes gets obscured by day-to-day noise, there is an obvious trajectory to it.  More importantly, you can probably feel the concrete hardening this paradigm in place with every passing day.  They WANT this.  They know the frog is getting cooked one way or another (this is 20 years past unavoidable), they just need the frog to stay docile so they can cook it without it trying to jump out of the pot.

fonzannoon's picture

what if the fed announced it was splitting up the bond markets and assigning 0% (essentially) borrowing rates to UST's and every other market would be assigned different borrowing costs?

NoDebt's picture

I would say that the "market" is doing something similar for them already.

2% inflation and 2.7% UST rates is pretty close to zero.

1% Euro inflation and 1.8% German treasury rates is pretty close to zero.

0% inflation (until recently) and 0.8% JGB treasury rates is pretty close to zero.

That's why I think the Fed is breathing a sigh of relief that rates only ramped up modestly (~100bps off the lows) and then "plateaued" after announcing tapering, and subsequenty beginning to pursue actual tapering.  They feel the potential storm of continuously rising rates has passed and the (financial) market has now accepted the new trajectory without their ongoing QE assist.

dirtyfiles's picture

someone being hit by that much of a coil spring would definitely go down lets see what market will do


BandGap's picture

I like Kate Upton for her mind.

Rainman's picture

JGB 10y in a range too ....     0.60%

you have to look all the way down to the bottom of the rabbit hole. The eventual flight of fiat from equities must land somewhere.

Muppet's picture

Always the when

buzzsaw99's picture

price fixing, get yer fixings, ala libor, ala yen, ala gold...

asteroids's picture

Now, if you were short any of this stuff, you would have been chewed up by the boyz. If you can't be short, or long, you need to be in cash.

DowTheorist's picture

Coiling is not only occurring in interest rates. It is also affecting other markets like gold, silver, and even the SPY to a lesser extent, as explained here:

As to interest rates, here is a specific study of "coiling" and its implications: