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Do Not Underestimate How Low Treasury Yields Can Fall
Via Scotiabank's Guy Haselmann,
Do not underestimate just how low Treasury Yields can fall this week.
Many global macro factors are coming to a head. Downside in Treasury prices are at minimum limited this week. My flattening call the past few days has worked well, but while I am not sure what the curve will do the next few days, I am confident that rates will fall and possibly by a lot more. Treasuries are a safe haven, under-owned, under-loved, with pick up in yield to other sovereigns and denominated in a safer currency.
A few bullets (not a complete list):
The Chinese Securities Depository Corporation announced it will no longer accept corporate bonds rated lower than AAA for repo transactions. Chinese equities were weaker by 5%. As Paul Bertrand said, this will affect more than $76 B worth of issuance. Credit spreads are widening.
Germany and France are bickering in the press. Merkel gave a harsh interview last weekend critical of France and FM Sapin of France made comments today where he said that Germany’s criticism of France’s budget is fueling Anti-EU sentiment….
The JPM Emerging Currency Index has fallen to an all-time low.
Oil dropped 4% yesterday. Ruble is down almost 50% this year, Nigeria Naira at all-time low, CononoPhillips said it scale back capital expenditure plans next year and spend 20% less – this is an example of oil price drops impact on the energy and shale industry. Energy stocks and bonds have gotten killed.
Equity indices are near highs, but have negative breasth, rising VIX, and divergences with HY. Defensive sectors have been the stars such as Health Care and Utilities while Industrials and Consumer Discretionary have lagged.
VIX was up 20% yesterday.
Greece has called a snap presidential election next week. It could possibly and eventually lead to a dissolving of parliament which could give rise to Anti-EU momentum. Greek 10’s are 58 basis points wider today and equity index down 11%
Italy was downgraded last week. Many believe the ECB will do Sovereign QE and so they are playing for the convergence trade. It is certainly binary; EU sovereigns are likely only to diverge or converge. Convergence has been the theme and pricing is likely too optimistic at this point. ECB sovereign QE is not certain until they do it (though markets have come to believe it is certain, so it is mostly probably priced in at this point).
The yen traded almost 122 Sunday night and now around 119.50 (118 lows earlier). $ in general is off highs today. As global events look uglier, investors play for a less hawkish fed and the dollar falls. When things simmer down and US economic data continues to print healthy, the dollar rallies.
The BIS Quarterly report yesterday outlined several themes that I have touched on over the past several months. Even though the BIS has sounded the alarm for several years now, they raised valid concerns in this report about the impact of the large amount of foreign borrowing by EM corporates ($2.5 trillion).
- Corporates, particularly in many Emerging Markets, have taken advantage of easy global financial conditions to ramp up their overseas (USD) borrowing and leverage. As the USD has risen, the liabilities of those firms rise, while their repatriated proceeds – i.e., assets denominated in local currencies – fall. These pressure have already begun and are more than evident. These corporate exposures are bad enough, but could easily spill into vulnerabilities for both local banks and the financial system more broadly. It is hard to say how aggressive the fallout will be because a good deal of the risks have ended up in the hands of yield starved investors.
- It does not help that several domestic central banks in certain countries have been raising rates to stop capital flight over fight inflation from their sinking currencies. Throw in weaken demand from China’s morphing growth model and softening credit bubble and a negative feedback loop is evolving.
- Those in the worst position are those countries dependent on commodity exports, those who have a current account deficit, or those who try to peg their currency to the USD (like China). The commodity exporters may be dumping commodities at even lower prices to secure more USD. Structural change to the US current account deficit (lower deficit) due to the Shale Revolution is a defacto-tightening to the rest of the world.
In addition, the drop in oil has crushed the energy sector and hurt several HY issues whose proceeds were tied to Shale. HY saw its high in June while SPX made a new high last week.
The divergence between SPX performance and EM and HY is unlikely to be sustained and is now showing signs of cracking as history suggests it would.
Fixed income managers are short duration and long credit. These position could rebalance into this week’s refunding. Dealers and hedge funds are short and leaning against supply, especially since the 10 year auction and sometimes the 30 year auctions have struggled in the past 6 months.. But, supply begets demand. It is only supply NOT on a calendar that materializes in a surprise fashion that is typically negative for the market, so leaning of this refunding supply is unwise.
Again, Do not underestimate just how low Treasury Yields can fall this week.
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There is no part of the market that's not rigged. Buyer beware.
G20
where the foreign exchanges get fixed
Wait till you see the white of their eyes.
At 1% I go short!
Important piece.
We should also think about the consequences of extremely low rates, say 1% 10 year, 1.5% 30 year.
That would bankrupt nearly all pension funds and insurance companies, and make fools of any and all buyers. Think about it, at those rates, the slightest uptick would cut the value of your investment in half. Yield free risk, indeed.
good times bitchez !!
JGB2y @ -0.01 %
JGB10y @ 0.41 % JGB30y @ 1.37%
Thanks for reminding us.
Why does that make me think of Scary Movie???
But ... negative interest rate Victory Bonds are inherently safer than gold!
Besides, not buying a negative interest Victory Bond is evidence of treason.
My Econ book says rates usually go down through a contraction/ / recession / depression / crisis.
Guess I can burn that book.
Thats what they said last time
That's why QE was terminated. But now that the system is faltering again- because there is no way it could do otherwise as global debt levels are too great- "they" are going to (sooner than they hoped) be faced with getting back into the buyer of last resort of bad debt business. And that is why rates are going to go up not down. Because, when they have to return (like a dog to its vomit) to QE Ing, or whatever they call it, the world is going to sell their holdings into it. One might think that this will lower rates, but only for a brief while. After the world sells into the always bidding U.S. buyer of last resort, they will not be reuppIng without, you guessed it, much higher rates as an inducement. Then we will be right on the cusp of the endgame which is a run out of the currency into the physical plane. Timeframe: Two years.
Dead on balls accurate. Except I disagree that QE was ever terminated - they're still doing it, just under the table.
I'm no finance whiz, but then I've seen all sorts of them being wrong and getting burned by TPTB.
For this very reason, given that so much is rigged, the info they have and manage, and given that "they control the horizontal, they control the vertical", NOTHING would surprise me as to how low they can go.
The better question might be: How low can YOU go? How long can YOU last in these endless wash, rinse, and spin cycles?
I'm hedging (in part) with vintage wine. Much better ROI. :-) Speaking of which... good night.
And the parts that aren't are affected by the parts that are.
Yes, negative infinity is a significant drop.
" Equity indices are near highs"
Now a days we simply take that as a given. A constant in the economic equation. Although it is the biggest manipulation in modern economic history, Equities are the province of the Central Bank and it's power to print. A market based Equity market would hardly look like this one does, there are no fundamentals in the economy to justify Equity Share Prices, only manipulation by the Dollar Hegemon of planet earth, the US Federal Reserve.
The powers that this global dollar dictatorship gives the Federal Reserve and, earth's most indebted entity, the US Government are unprecidented in global history. Perhaps Rome can compare, but Rome's currency was not the reserve of China, India, South America and the vast Russian wilderness. King Dollar is so powerful, that deapite the 13 trillion dollar interest bearing debt, we see above that the US Treasury Bill is again sought after. Many still seek the safety of a nation 13 trillion in debt and owing the interest on that debt which is serviced by the T-Bills the safety seekers will be buying! It is indeed a story worthy of "Game of Thrones" of some such fantasy world/
Stop making this sound complicated. The Fed is just printing debt. PERIOD. That is RECESSIONARY.
In THEORY you can "make it up by inflating all the debt away" but in practice "your worthless dollars now can meet the biggest energy boom in human history." So the Fast Money folks bid equities to the moon and start raising cash "waiting for the next collapse." The Yen looks like a perfect ATM machine to me. If you've been short that currency forget being long gold and silver as the other side of the trade...you want to be long "restructurings" and "IPO's."
Interest rates in Japan do not reflect the currency collapse. Certainly oil markets now do. That is/was the second largest economy in the world and that is a massive amount of demand destruction. Normally that would be the start of some type of contagion. Certainly price wars in the cellular service space are well underway....
With no wage inflation, you have no inflation it turns out. I'm curious how Weimar both printed itself into oblivion and had wages that were floating with the currency supply better than the enlightened "free" labor markets we have today.
simple, give everyone access to money at 0.25% interest. there is a reason that only the primary dealer banks get that deal from the fed right now.
I seem to remember reading that most workers in Germany at that time were union and there wages were very tightly linked to the inflation rate.
You don't have to go to Weimar.
Gold standard was around back then during Wiemar, so it was a bit more honest and harder to coneal printing.
But you only have to go to the 70s in the US for a perfect example.
Back then, COLA was part and parcel of every union/government/ contract, and the numbers were not rigged liked today.
Rates shot to the moon due to WAGE inflation. Volker knew the deal.
you can't have random fuckers running around expecting 12% COLA every year.
So he put a stop to that shit.
I have said this many times before (and got thumbed down frequently)....but I will say it again:
There is NO inflation unless there is WAGE inflation.
I don't give a shit if oil is at 500 bucks and gold a million an ounce......the fed will still scream deflation.
This is what they are doing, have always done, and will always do.
ANd this is why I supported the McDs guys getting 15 bucks an hour. Not for them. Because this system is utterly corrupt, and some kind of wage inflation needs to occur so these fuckers at the fed can stop denying the blatantly obvious.
So, you think you can simply ignore how leveraged many of the companies behind that "oil boom" are?
LMFAO!!!
Sure: Weak hand, meet Strong hand. Strong hand, meet Weak hand. Shake hands.
For every desperate seller, there's a happy buyer -- with Friends with Deep Pockets (at GS or the Fed).
In a word: CON-SOLID-ATION. Big fish eat little fish.
When the ten year hits 1% then I'll start selling.
"Mav, i got your 6"
that or when all government debt instruments of similar duration equilibrate.
'Emerging markets'....oh for fucks sakes....at this point everyone's a 3rd world shit hole inured to the next round of free money.
Dahn't cry for me Arhaintinaaaaahhhhh.
Seriously though, who's gonna bail Venezuela, when they went through the China loan in a New York minute?
Aw, c'mon. It will be the typical players, with a backup from the US taxpayer when the loans go bad. These guys never mind sitting down at the wheel of fortune for any reason when stupid voters stand behind any losses or mistakes.
Could be, but you bail one, you have to bail them all. The line already stretches to Tiera del Fuego.
(end of the earth, in Anglish)
"Treasuries are a safe haven, under-owned, under-loved, with pick up in yield to other sovereigns and denominated in a safer currency."
They're a 'safe' haven at the pleasure of those nations who, primarily for convenience sake, choose to deal the way it always been done - in $dollars. Affronts like H.R. 758 however are going a long way to help along the geo-economical shift taking place as we converse, leading up to a good knee-capping event in the near future.
While I do not doubt US Treasuries can go lower in a crisis, they are already at a rate that does not provide enough interest to be worth the risk of holding them (very similar to a CD at a bank these days). If I cannot earn interest on my paper money, it seems to me that treasuries are just like gold and silver (which do not pay any interest). But with PM prices being suppressed this much, the upside to PMs is far more likely than the value of earning 1 to 2 percent in treasuries.
"a rate that does not provide enough interest to be worth the risk of holding them" --- you do realize how long this paper is actually held right?
there is a LOT of capital gain appreciation to be had if (when) 10yr note hits 1%
Buy ten year at 2.3 yield, sell at 1.75 yield.
THERE'S your return.
Roll gains into precious.
The world's debt load can be your friend.
For a while.
"Do not underestimate just how low Treasury Yields can fall this week."
"this week"?
no bigger bond bull than i ... but making a call for this week?
hoo the eff noos
TLT pays another div 12/24.
But mostly to beat the high yield panic flee.
I spoke with several Atomizer banks today. No policy changes in regards to NIRP. Most of the banks are primary dealers hunting to scurry up last minute crisis mode on lost TARP re-payment schedules.
/sarc
There is no such thing as cash (other than the bills in your pocket). There is only higher and lower grades of debt. Treasury obligations are more cash than a bank deposit. The two year will hit negative 20bps before it hits 200bps.
Cashiness steadily moves out the curve as deflation takes hold.
BINGO!
"......Treasury obligations are more cash than a bank deposit......"
.
Beware the fed or banks selling treasuries to jerk the chain.
Play your hedges.
There is potential for hard pressed sovereigns to sell as well.
Pigs get slaughtered.
Sell to who? There is little to zero chance the Federal Reserve can sell any of their debt to anyone outside of a forced action. They will be lucky for the US Treasury to be able to roll over all of the existing debt at these current interest rate levels. Once this begins to unravel and get exposed it's game over for the economy and possibly the US dollar and monetary system.
You are correct.
My assumption also. But a quick giant squeeze out of bulls is possible given enough weak hands.
Treasury yields have bottomed. The 10 year is about to skyrocket upward...
http://www.globaldeflationnews.com/10-yr-u-s-treasury-index-yieldelliott...
......said all the desperate tbond shorts.
Elliot wave magic, aw yea.
Treasury market too big to fix, which is why its always right.
Sub 1% on the ten year is where we're headed IMO.
Clue...TLT IS UP 30% this year......not counting the 3% div
The sad thing is that there's a large group of people who think that outsized returns in bonds, especially government bonds, is a normal state of affairs.
YEAH! Just because it has been for the past 35 years doesn't mean it always will be.
The chart of equities and real estate overlaid with tbonds is a big X. As rates came down the others went up.
Zero is most likely the end of that. But then again......
(the sad thing for me is that they are just catching on)
"Germany and France are bickering in the press. Merkel gave a harsh interview last weekend critical of France and FM Sapin of France made comments today where he said that Germany’s criticism of France’s budget is fueling Anti-EU sentiment…"
So what if the Vassals are bickering? It doesn't matter, won't change anything and it's no different than if the governors of Illinois and Wisconsin are bickering.
"Do not underestimate just how low Treasury Yields can fall this week."
You talkin' to me?
You talkin' to me?
You talkin' to me?
Too late.
Waitaminute, you said "this week"? What's so special about this week?