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Treasuries at 7-Week Low Yields As HYG Signals Way Again
Gold and Silver outperformed their less precious commodity cohorts today as equities (and credit in general) managed a see-saw day centered around a dud IMF-bazooka and more-of-the-same from the FOMC. Stock and Bond markets stayed in sync early on as risk was decidedly off this morning following the weak GDP print though we do note that IG protection was bid even as stocks managed a small rally across the open.
As news broke late-morning of the new IMF facility, equity and CDS
indices jagged higher but once again it was HYG (the high yield bond
ETF) that was the market-tell for reality. Notably HYG still has plenty of room to drop to catch up with HY spread's recent performance (and furthermore the HYG-LQD relationship remains notable below where HY-IG credit spreads would suggest). Given today's movements in HY and Equities, short-term targets for fair-value in the S&P 500 cash has leaked lower to 1158.
One other indicator of note for risk appetite is the relationship between index vol (VIX for example) and implied correlation. We have shown this a number of times recently and today's last hour or two had a worrisome pattern of index vol selling but implied correlation rising - signaling a demand for macro-protection (index vol > underlying components vol) even as vol compressed. This has tended to forewarn short-term corrections lower.
While equity and credit were largely in sync early on, relative to the broad CONTEXT basket of risk assets, equities
were alone in the morning sell-off and their early afternoon retracement on the IMF news merely
took them to CONTEXT reality (as seen in the red oval in the chart below). This perhaps helps explain the stalling of the rally (as the FOMC minutes broke) and the much more concerted (and correlated) sell-off of the afternoon as post-auction TSYs (and marginally oil) were the main drivers.
As we have been warning, the next leg down in ES would likely be driven (from a correlation-sense) by TSYs which had not cracked as much as other members of the risk basket. Today's heavy demand in the 5Y auction and decidedly risk-off sentiment was enough to do that as 2s10s30s dropped dramatically and yields across the curve cracked lower. 5Y is actually outperforming (5 and 7Y are -20bps from 10/07) as the curve has steepened modestly from 5Y out since October 7th. 30Y is now 60bps lower than its peak right after the EU Summit on 10/27.
During the morning session, Silver gapped over 1% higher (having staged a 7% rally off the midday yesterday lows) in a seemingly liquidation-driven move (which was closely followed by a rapid shift down in stocks). Silver and Oil synced up with the dollar on the week briefly into the European close but Silver was the high beta mover this afternoon - now +1.1% on the week as Gold managed a decent run today to close marginally shy of $1700 though -1.45% on the week.
All-in-all, a concerted risk-off day with the early demise of stocks not supported by broad risk-sentiment but the shift into TSYs after the 5Y auction and compression of the curve was enough to bring stocks and risk into sync and notably lower. The leading nature of HYG again is fascinating and tracking the relationship between SPY and HYG is very useful (though not perfectly correlated). Equities are still in catch-up-to-credit-weakness mode on a medium-term basis and given the minimal impact of an admittedly weak IMF bazooka today (and the low volume / low liquidity environment of the reat of the week), we suspect there is more selling to come - especially given the late-day news of the stress-tests which we suspect will mean some expensive capital raises (and don't forget all that TLGP debt maturing between now and the stress test results).
Charts: Bloomberg and Capital Context
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LOL- can still double your money in the 5 yr- awesome.....
Praise Jesus!
Bring it down! Daddy wants a mortgage refi!
Time to refinance my house so I can lower my rent payments to the bank.
you are calling the bottom in interest rates, tct.
I´m stll hesitating to go short treasuries.
You think Bernanke is Jesus and the Fed is G-d? The only reason they are keeping rates low is because the other hand, the invisable one, is acting like a fool in Europe. The world is a stage!
How can it go much lower?
I stand here in awe of multigenerational lows in mortgage rates.
Got Duration? ZROZ
politicians getting long here in anticipation of the manipulated jobs number tomorrow morning.
from WSJ
LONDON—CLS Bank International—which operates a settlement system that is the backbone of the foreign-exchange market—is running stress tests to prepare itself for the possible breakup of the euro, people familiar with the matter said Tuesday.
The tests form the first solid sign that the currencies-trading industry is preparing for the worst from the common currency area's deepening debt crisis.
The New York-based industry utility, which ensures that each side of currencies trades gets paid, is keen to ensure that its systems are well equipped to cope ...
Should be bullish for gold going into the US holiday break this week... Expect some new drivel from the EU claptrap over the weekend to FUBAR everything going into next week.
This market is simply insane.
silver-time, BiCheZ!