Let's Twist Again? The Bond Market Is Hinting At A Huge Disappointment For Stocks On June 20

Tyler Durden's picture

When it comes to the future, suddenly torn by economic uncertainty driven by a plunging stock market and a tanking economy, the talking heads and the sellside brigade have opined: more QE, preferably in the form of asset purchases. After all it was none other than Goldman earlier today who said that "our confidence that the FOMC will ease policy once more at the June 19-20 meeting has also grown... Our baseline remains that Fed officials will purchase a mixture of mortgages and long-term Treasuries, financed via balance sheet expansion... If they decide to extend their balance sheet, they could add excess bank reserves or “sterilize” the reserve impact via reverse repos and/or term deposits." In other words: not sterilized, or bye bye Chubby Checker (recall that even Goldman finally admitted two months ago that when it comes to Fed intervention, what matters is flow - as a result Twist has been largely ineffective in recreating the effect of QE1 and 2). To be sure even more respected investors like Pimco have bet the house that the NEW QE will constitute primarily of more MBS purchases. Yet the real question is what is the bond market telling us: after all when it comes to matters such as these, one should completely ignore stocks, and certainly the talking heads, and instead focus on what bonds are saying. And here is where the stock market may be headed for a great disappointment: because now that the bar has been set so far, anything less than full blown LSAP, or a merely extension of Twist, would likely send stocks plunging. Which, ironically, and completely in opposition to stocks, is what bonds are expecting...

Recall that Zero Hedge first presented two months ago the refutation to Hilsenrath's manufactured leak that the Fed could do more QE if need be, in the form of more Twisting. Well "need be", however there is one small problem: the Fed will run out of bonds to sell in the sub-3 Year maturity window: after June 30, the Fed will have only $175 million of sub-3 year TSYs in the SOMA, which means an outright extension of Twist under the existing conditions could last at most another 2 months.

There is however one loophole: merely shifting the selling "detachment" point one year to the right: instead of selling 3 Years and less, the Fed could sell bonds maturing in 2016 and sooner. This would provide the Fed with enough dry selling powder to last it for quite a few months.

This is precisely what bonds are implying will happen, as the below analysis from Barclays.

It also means that the stock market, which is now fully ignroing the possibility of a simpe Twist extension, and demands unsterilizied Balance sheet expansion, will be very, very disappointed if on June 20, Bernanke announces what the bond market is saying right about now.

From Barclays:

Well I've been gone for a while, so I thought I'd just share observations on my return. With the poor report, chances of additional easing have increased. So far it seems the marktet has moved away from pricing in qe through sterilized reverse repos as 1yr OIS is moving virtually in line with overnight fed effective (chart 1).

This shouldn't happen if you expect reverse repos down the line. Instead, the market is pricing in an op twist extension into the 4yr point. Attached is a chart of the 3 week change in Tsy-OIS through the curve graphed against the remaining SOMA holdings within a 6 month range of each maturity point. As you can see, there has been a huge cheapening in the 4yr point where the Fed would need to move into to continue twist and the other notable mini spike being around the 2/14-4/14 area where the Fed still has large holdings.I'm still not sure what the Fed will do and haven't fully judged the valuations off these moves, but I thought it interesting to point out how the bond market seems to be voting so far in terms of additional easing.


Translated: when it comes to what is announced on June 20 at 2:15:01 pm (assuming there are no more Federal Reserve Xerox machine snags), bonds are bracing for the worst: which under the current circumstances is the Venn diagram intersection between full blown LSAP-based QE, which would at least send stocks soaring, and no QE at all, which would at least preserve the illusion that a virtuous cycle is still possible if only on paper.

Under these conditions, Chubby Checker would be the most unwelcome visitor for what is left of the equity bulls possible.

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pleseus's picture

Has Wall Street seen the price of gas and food?  Additional QE will kill the real economy.

The Monkey's picture

Large scale QE is unlikely to win the Fed any friends (other than the fellas at CNBC). Anything less than a large scale balance sheet expansion would be the proverbial fly on an elephant's ass.

My guess is that they do something along the lines Goldman described and also use verbiage to remind everyone that much more could be coming at any time. Leave it up to the market to make the case.

flacon's picture

Hey Bernanke.... you gotta fuck shit up man! Zimbabwe is making you look like RuPaul, you lilly livered panzy! C'mon man, show us your sweet balls and give us some of your Zim-Stim!

Matt's picture

So, which stocks will dive the hardest if there is no QE3 announcement? Financials?

The Monkey's picture

Financials, high beta and the less liquid indexes (small cap). These are also the types of stocks that will rally the most on a dillutive balance sheet expansion, other than PMs.

BlandJoe24's picture

Similar question for Tyler:

If Fed announcemnt is as you say above (extended Twist, NOT balance sheet expansion), what do you think will happend to USD, EUR, 10yr, and 30yr after the announcement?


Overfed's picture

You ain't kiddin'. Bought a bag of dog food and a few sundry items today, and spent like $70.

2% inflation? In a pig's ass!

flacon's picture

Those were the good ol' days. Here in Canada a bag of JD dog food runs $120CDN for the big bag. I'm about ready to grab a banker and grind him up for feed. Ground banker. Mark CARNEY is a prime candidate. CARNE!

Doubleguns's picture

Flacon, at those prices I would be feeding my dogs road kill moose.

eclectic syncretist's picture

Uncertainty in Europe will stay the Fed's hand.  Banks need to get their balance sheets in order, and a hell of a lot less opaque, in a hurry if they want the Fed to issue them more credit.

kita27's picture

What is all the commotion, the Dow hasnt even fallen below 12000 yet?!

ACP's picture

So why can't the big (US) brokerages do this kind of analysis?

Oh yeah, their job is to screw people...


fonzannoon's picture

It would be awesome if the fed was stuck with only long dated maturities when the long end finally blows up.

midgetrannyporn's picture

Send my QE $3K check first.

Mae Kadoodie's picture

Can I take my QE share in two Eagles instead of fiat?

midgetrannyporn's picture

no, that would be like $3200.

flacon's picture

I'm trying to think of a good come-back line, but I just can't. I've been sipping the silver nitrate this evening and everything is so fucking blurry. 

Matt's picture

But it's only $100 face value. Give me 60 X $50 coins please.

veyron's picture

what exactly is your avatar depicting?

Overfed's picture

Something to do with transgnedered little people fornicating on camera for money, I suspect.

Overfed's picture

Something to do with transgendered little people fornicating on camera for money, I suspect.

midgetrannyporn's picture

You have to pay to get the whole picture. ;)

flacon's picture

Ben Bernanke wearing a pink Romulan hat. If it's anything different then I'd probably be disappointed. 

Problem Is's picture

"Send my QE $3K check first."

When Shrub Jr. tried to bribe me and buy my vote... He mailed out tax rebate checks with "Courtesy George 'Shrub' Bush" printed right on them...

This fucking idiot Barry Soetoro... can't even bribe people right...

Obama Bin Lyin'
What a worthless cock sucker...

GernB's picture

Gotsta buy those thingamajigs.

ISEEIT's picture

Oh for fuck's sake... Do you people really need to be so NEGATIVE?

At least they trying right?

narnia's picture

It seems to better for the career of someone in the government to intervene & fail miserably than do nothing, even if nothing produces a much better outcome.

flacon's picture

Iseeit, you have to add a slash ess to the end like this "/s" so that people know you are kidding. /s

Paul Atreides's picture

If you mean 'trying' to rip us off, steal our prosperity and deprive us of a future then yes...yes they are trying.

q99x2's picture

Yea they're trying. They are staffing the FEMA camps arming DHS with enough ammo for a 7 year war and putting up predator drones. They are preparing to kill us you freakin idiot. That's what they are trying to do.

Banksters going to get you.

razorthin's picture

Too hateful - had to retract.  I can hardly contain my anger.

Crab Cake's picture

Nope. This is fight club, you let that shit out full throttle. This is where its safe to do it. Do not bottle it, and dont scare your family and friends; you do it here motherfucker. Now put up your god damned hands and at least act like you mean it.

LetThemEatRand's picture

TPTB like Obama, but they prefer Romney.  O is a useful idiot they used in order to convince the masses that "socialism" is the problem with our economy.  Romney is literally one of the oligarchs.  They couldn't crash the economy during the primary cycle because it could produce an outlier candidate like Paul if people were freaked out enough.  Now that Romney is the locked nominee, they can crash the market ahead of the election and then have mainstreet begging President Romney to eliminate social programs, reduce taxes on the rich, and QE to infinity.

ISEEIT's picture

But at least obama got to be part of it right?

It was all going to blow up anyway and at least he was able to help.

Seems 'fair' to me.

CClarity's picture

Twist and Shout while you wait to see what it looks like when hundreds of trillions of derivative CDS implode and shut down markets everywhere.  There is no plan to avert that.

CloseToTheEdge's picture

(OCC) showed that the top five SIFIs — Bank of America, Citibank, Goldman Sachs, HSBC and JPMorgan — collectively accounted for more than 50 percent of the $700 trillion OTC derivatives trades worldwide in total notional value. JPMorgan alone accounted for more than $70 trillion of the $700 trillion, the report said. “That [$70 trillion] represents one-tenth of the global OTC derivatives exposures.
The official said he found it alarming that, when the top five banks’ assets and total exposures to derivatives activities were added up, they showed a leverage of one to 45 times.

(an yet 'they' claim to be pricing them in)

be afraid.

eclectic syncretist's picture

Like the Fed thinks that banks are going to go out and lend huge amounts of money to all the underwater homeowners.  Or that the underwater homeowners want to take on even more debt.  LMAO!

mickeyman's picture

They have to do something to get the price of diamonds back up? What are those poor diamond merchants going to do?

LeonardoFibonacci's picture

smuggle to London & Belgium for loads of cash

ISEEIT's picture

Kony took out the diamond dudes.

It's all on Obamommy now.

casey13's picture

This is the free trading US bond market where the fed buys 61% of the total that is sending a message right? 



Bunga Bunga's picture

As a reminder: June 17 - elections in Greece. Markets will tank for a while, if a radical leftist government gets into power. Why would Ben support them an try to ignite a stock rally? Better keep the powder dry and all will blame the leftist government for a global meltdown.

erg's picture

Let's hear some Benmosche Bernanke acronyms. I'll start.

Bankers Been Mochen

Edit: Menns Banker Beyoch

lailapa's picture

The end of the world is near... The ten plagues of Pharaoh “have been brought upon” the USA.



Total darkness covered all Egypt for three days, the kind of darkness “that could be felt” as if a thick fog (Exodus 10:21-29)

The attack had an immediate outcome. The outcome is everything we see, the kind of life the Americans are leading nowadays. They have lost everything and now they fail to survive. American “imperialists” stand hungry and sleepless around the fire and “feel” the Wall Street Index which describes the “darkness” of their foreign debt. They are unemployed, broke, insolvent and mostly lost, stripped of any hope for the future. They have no idea of their origins or destination. They can’t even plan their next step; so big is the size of their “darkness” that they can feel it.

Shock and Aweful's picture

That article was nothing more than some bullshit anti-jewish garbage about how Americans are doomed because we have been taken over by the Jew (or something to that effect....the whole thing is really just an opinion piece with no facts at all...opinions are like assholes ...everyone has one, and they almost always fucking stink.

I don't care if it's a  Jew, a Christian, a Muslim or a scientist...anyone who thinks they have the only answer is fucked in the head...and that type of thinking only causes problems for the few people here on earth that are still rational

This shit you linked to here is absolutely worthless....as are more aguements based on sweeping generalities, superstitions, religious ideals or dogma...quite wasting our time by posting that fucking drivel.



zorba THE GREEK's picture

Because the Bond Market is pricing in the Fed staying pat June 20, does not

mean The Fed won't ease. It just means it is not a sure thing, yet.

The gold mining stocks have priced in deflation for the long run, but

I am very confident that The Fed and TPTB (those who really run The Fed)

will do everything in their power to fight deflation, as it is their worst nightmare.

The Bond Market is just sending a signal to the Fed and the politicians that they

better ease or else feel the rath of the Bond Market.