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US Treasury Curve 1990-2012 In Its Full 3-D Glory: Redux

Tyler Durden's picture




 

Just under two years ago, when we mocked then Morgan Stanley's analyst Jim Caron's call for a surge in long-dated yields on the back of an improvement in the economy (not something more realistic like the Fed losing all control of the TSY curve), we penned "Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future" in which we said that contrary to pervasive expectations of a bull steepener, the treasury curve would continue flattening more and more, until the whole thing would become one big pancake. Today, we have decided to revisit that post: in short - Jim Caron was fired by Morgan Stanley as head of rates following 3 consecutive years of bad calls starting in 2009 (only to be rehired in June as a Portfolio Manager... oops), while our view that sooner or later the 2s30s will be 0 bps is over one third complete.

To wit, from August 2010:

The chart below shows the UST yield curve over the past 20 years: as is more than obvious, every single point left of the 10 Year is at record tights. The only question on everyone's lips is where do we go from here. And that is where the confusion really hits.

 

 

Of course, it is now obvious what the Fed wants to achieve, as it gets ever close to using the last available nuclear option: outright monetization of every single asset class. The graphic representation of what Bernanke would like more than anything to be the economic reality is presented on the chart below.

 

 

We hope that when looking back in 2012 at this post we are proven wrong, as a completely flat yield curve coupled with an economy that is collapsing ever faster, is the surest way to an outright stock market supernova, that will take obliterate all asset levels in a bout of hyperdeflation (for leveraged items), followed by hyperinflation (for items purchasable by banks with discount window access).

It is now 2012, and we can look back. We have not been proven wrong. The 2s30s (or 0s30s - it is all the same now that ZIRP+3 is Fed policy, soon to be +4, +5, etc leaving less and less places on the curve to frontrun) is not 0bps quite yet.... but it is well on its way, and is now 150 bps tighter than it was on August 15, 2010.

Furthermore, our forecast from 2010 for a flat curve is still as follows: "a bout of hyperdeflation (for leveraged items), followed by hyperinflation (for items purchasable by banks with discount window access."

And yes, our conclusion from back then still stands:

The bottom line is now that the Fed is once again actively involved in controlling the curve, and thus risky assets, the result is utter confusion. If two of the biggest investment banks can not agree on something as simple as the shape of the yield curve, how is it that they or anyone else, can have an informed opinion on where assets that return more than 4% (in 30 years) will head in the future. Essentially, uninformed coin flipping is now the best paid occupation in the world.

And courtesy of Konrad, here is a video animation of all of the above using Amibroker.

 

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Mon, 07/16/2012 - 13:31 | 2620764 ZerOhead
ZerOhead's picture

Going down are we?

 

Mon, 07/16/2012 - 13:42 | 2620890 Thomas
Thomas's picture

Are those graphics cool or what?!

Mon, 07/16/2012 - 13:53 | 2620932 Jena
Jena's picture

Indeed, extremely cool.

Mon, 07/16/2012 - 14:40 | 2621124 fuu
fuu's picture

+1 to Konrad, awesome animation.

Mon, 07/16/2012 - 15:16 | 2621245 Manthong
Manthong's picture

Flatten the flag?

Seems appropriate.

 

Mon, 07/16/2012 - 15:45 | 2621363 notbot
notbot's picture

Tyler, can you post the data?

Mon, 07/16/2012 - 16:11 | 2621494 max2205
max2205's picture

Ah...paper covers rock!!  no prob

Mon, 07/16/2012 - 13:52 | 2620928 Uber Vandal
Uber Vandal's picture

Too bad the charts were not adjusted for inflation and or taxes.

The yields would be far less than zero then.

Though prior articles today insist that NIRP is not likely, or even going to happen here, I keep thinking back to various countries outright stating that they will not devalue their currency.

Even IF the Fed went NIRP, the spin would be that "investors are seeking the safety of US Treasuries, even at a nominal -2%"

Mon, 07/16/2012 - 14:06 | 2620992 NotApplicable
NotApplicable's picture

I like them unadjusted better as there's less detail for people to argue over concerning their accuracy.

Mon, 07/16/2012 - 19:45 | 2622249 Captain Kurtz
Captain Kurtz's picture

NIRP i think is a strong possibility wether the Fed intends for its occurrence or not.  Investors WILL seek safety, and they WILL go to UST's.  Where do yields go under high demand for deficit paper?

 

Mon, 07/16/2012 - 13:12 | 2620766 ar01
ar01's picture

How did you make those projections? 

Mon, 07/16/2012 - 13:13 | 2620771 Cognitive Dissonance
Cognitive Dissonance's picture

Wow! 3D Chart porn......and in color no less.

Still, it looks like all roads lead to the bottom of the cess pool. Or are those just off ramps for the 1%ers?

Mon, 07/16/2012 - 13:29 | 2620836 Kitler
Kitler's picture

Looks like something one would see on the floor of the men's room.

I can just make out the imprint of Bernankes shoe from Jan 09 to Jan 12 up to the two year toilet paper.

Mon, 07/16/2012 - 13:56 | 2620945 Cognitive Dissonance
Cognitive Dissonance's picture

The Gold fixture holds the soon-to-be-worth-less-and-less toilet paper.

TP

Mon, 07/16/2012 - 14:18 | 2621045 101 years and c...
101 years and counting's picture

you must bank at the same Chase bank I do.  not very soft or absorbent, but it gets the job done!!!

Mon, 07/16/2012 - 13:14 | 2620775 Stoploss
Stoploss's picture

Beautiful.

Mon, 07/16/2012 - 13:43 | 2620893 Thomas
Thomas's picture

A Masterpiece of graphical output. You can see all the recession foreshadowings (yield inversions) and easings. Esthetically very pleasing.

Mon, 07/16/2012 - 13:25 | 2620796 JustObserving
JustObserving's picture

A picture of the reaction to unsustainable debts.  Interest rates have to be near zero or the US is bankrupt.  This may work for 6 months more.

USA is the new Stockton. Or is it Scranton (everyone at minimum wage)?  I would love to see Obama working at minimum wage though that would be overpaying him a bit.  That million plus from the richly undeserved  Nobel peace prize should be enough.

Mon, 07/16/2012 - 13:43 | 2620892 Bam_Man
Bam_Man's picture

Reflexivity in action.

But there is no way to sustain the negative real rates because they are DESTROYING CAPITAL. Insurance companies and pension funds will HAVE NO CHOICE but to abandon the bond market in the not-too-distant future. That will mark the end of the "Bond Bull" and also simultaneously set off the derivatives time bomb. That is how this monetary system meets its end.

 

Mon, 07/16/2012 - 14:41 | 2621126 AGuy
AGuy's picture

" Insurance companies and pension funds will HAVE NO CHOICE but to abandon the bond market in the not-too-distant future." That all depends. If the own 10yr and 30yr notes that they purchased before the yield collapse, it will be a while before they will have to roll into something else. Note that about a week or two ago the article that the Fed was having trouble buying long term debt for operation twist, as current holders didn't want to sell.

Many insurance and Pension plans are already underwater since they loaded up in CDOs, mortgages, etc during the bubble. Since there is no Mark to Market accounting, they can hold on to them without recording a loss  No matter what they do, they are screwed.

 With the global economy falling to recession its possible (but no mean definate) that the US can continue to print for up to a decade more before the dollar begins its fall over the cliff. The EU crisis has years to go before its finally done. While the breakup of the EU could begin later this year, its still going to take years for Europe to sort out the mess and put itself back on track. During which time, foriegn currencies, such as the US dollar will benefit. A major slowdown or recession in Asia will also strengthen the dollar.  Its obvious that the Chinese economy is in a Bubble, although its difficult to predict when the Chinese bubble collapses as China gov't clearly manipulates its currency and economy to defer a collapse.

Mon, 07/16/2012 - 15:33 | 2621286 Bam_Man
Bam_Man's picture

The end of the Great Bond Bull Market will come when the insurance companies & pension funds HAVE TO SELL (whether they want to or not) to raise CASH to pay out contractually promised benefits. And they will probably all have to start selling at roughly the same time. Once this process starts, Game Theory dictates that it will quickly gain momentum and be quite a sight to see.

Mon, 07/16/2012 - 16:06 | 2621465 AGuy
AGuy's picture

"HAVE TO SELL (whether they want to or not) to raise CASH to pay out contractually promised benefits."

Not when they can borrow from the Fed nearly directly (discount window) and just use their Mark-to-Fantasy Assets as collateral. See AIG as an example. The Fed just bought up the crap and will continue holds it indefinantly. Should the Bond market start to take (soaring yields), the Fed will set up to the plate and resume QE to infinity.

"Game Theory dictates that it will quickly gain momentum and be quite a sight to see."

That only applies when the rules of the game aren't changed.   Technically the Liquidation event already happed in Sept. 2008, but was stopped by the Fed. No reason to believe the Fed will fail to act if another sell off begins. The Fed backstopped more than 25 Trillion in assets. No reason to see them stop at 50 Trillion or even 500 Trillion. If the Fed fails to act, then its game over for the USA as the US gov't would be forced to hard default, Everyone at the Fed will be out of a job (if not hunted by street mobs). The only logical answer is that the Fed goes on printing and backstopping bad assets until the dollar dies.

 

 

 

 

Mon, 07/16/2012 - 13:18 | 2620797 HyperLazy
HyperLazy's picture

Behold the event horizon of the debt singularity... L O L

Mon, 07/16/2012 - 13:18 | 2620801 Al Huxley
Al Huxley's picture

Can you show the same 3-d view for Japanese rates?

Mon, 07/16/2012 - 13:22 | 2620808 Mercury
Mercury's picture

Wow, I didn't realize how flat rates were (but a lot higher) ~ early 1990.

The '90-'12 chart looks like a roll of tinfoil falling down the stairs and rolling onto the floor...

Mon, 07/16/2012 - 14:04 | 2620987 Lucky Guesst
Lucky Guesst's picture

LOL, kinda like an out of control SLINKY!!!!

Mon, 07/16/2012 - 13:21 | 2620810 knowshitsurelock
knowshitsurelock's picture

What?  No one wants to buy more debt, based on debt, paid for with debt, and backed by nothing?

gee, why not?

Mon, 07/16/2012 - 15:18 | 2621258 Ungaro
Ungaro's picture

+ "pay nothing". There, I fixed it for ya.

I am holding out for the zero-coupon perpetual ("Dan Quayle") bonds: no interest and no maturity. Bet ya they'll be hot sellers!   /sarc

Mon, 07/16/2012 - 13:24 | 2620812 timbo_em
timbo_em's picture

Is your software able to display soon to be expected nominal NIRP territory?

btw: the maturity scale is slighty misleading.

Mon, 07/16/2012 - 14:46 | 2621148 AGuy
AGuy's picture

Did the Treasury ever change the system so negative yields were possible? The last I can recall, that the current processing system could not handle negative yields. If they did change the system it would be an interesting, that treasury does intend to offer negative yields.

 

 

 

Mon, 07/16/2012 - 13:21 | 2620814 Lucky Guesst
Lucky Guesst's picture

Very impressive but is there anyway you could depict this graph using a toilet bowl?

Mon, 07/16/2012 - 13:28 | 2620840 mademesmile
mademesmile's picture

Now that you mention it, it DOES look like TP soaked in tidy bowl blue cleaner.

Mon, 07/16/2012 - 13:35 | 2620864 Unprepared
Unprepared's picture

Or at least using toilet paper for the chart.

Mon, 07/16/2012 - 13:24 | 2620823 vidman32
vidman32's picture

followed by hyperinflation (for items purchasable by banks with discount window access).

 

Exactly what are items purchasable by bank with discount window access?

Mon, 07/16/2012 - 13:37 | 2620869 Widowmaker
Widowmaker's picture

A:  Politicians and justice Inc.

Mon, 07/16/2012 - 13:29 | 2620838 ptoemmes
ptoemmes's picture

Animate that chart....might get seasick.

 

I think I see Laird Hamilton in there.

Mon, 07/16/2012 - 14:04 | 2620986 Jena
Jena's picture

There might really be Laird Hamilton waves if the charts went back another fifteen years...

Mon, 07/16/2012 - 15:59 | 2621416 ptoemmes
ptoemmes's picture

Konrad - Cowabubga dude.  Doing just fine 'til you rolled that thing backwards. 

 

 

Mon, 07/16/2012 - 13:29 | 2620841 ebworthen
ebworthen's picture

Looks like Santa's list of good kids written on aluminum foil that he had to stuff in his pocket when the reindeer went on strike because the elves were getting bonuses and champagne for overloading the sleigh.

Mon, 07/16/2012 - 13:29 | 2620849 john_connor
john_connor's picture

I would consider the stock market as a "leveraged item", no?  If so, we have yet to see the hyperdeflation first play out before the hyperinflation.

Mon, 07/16/2012 - 13:30 | 2620850 Zola
Zola's picture

Could we have the same 3D graph for greece Tyler plz ?

Mon, 07/16/2012 - 13:31 | 2620852 cougar_w
cougar_w's picture

It's a little scary if Tyler is getting this one right, even if the timing reemains uncertain.

At the very least if we're getting this analysis here from crowd-sourcing, it must stand that TPTB know the same thing. We say every day "their hands are tied" but if they can see this coming I'm relatively certain they are already coming up with counter-meaures that we would today label as "insane".

We just heard today that negative interest rates paid on reserves is "insane". Really?

Confiscating gold is usually poo-pooed as "insane". No doubt it is.

Direct monetization of equities is "insane". Okay fine.

We'll see.

Mon, 07/16/2012 - 13:33 | 2620857 Silverhog
Silverhog's picture

Looks like somebody stepped on a pile of wet cardboard.

Mon, 07/16/2012 - 13:32 | 2620858 whoopsing
whoopsing's picture

Looks like sheetmetal after a car crash

Mon, 07/16/2012 - 13:40 | 2620879 thegr8whorebabylon
thegr8whorebabylon's picture

Syria in civil war now

"5x bomb iran' , romney

we need a timing-chart of huge deflationary dip just b4 hyperin. a la Argentina circa Christmas 2001.  And then extrapolate for us.  plse  & thnks.

Also....if ur life flashes b4 u in the next short while,

... ask 4 mercy

Mon, 07/16/2012 - 13:41 | 2620883 Everybodys All ...
Everybodys All American's picture

let me know when both sides pancake.

Mon, 07/16/2012 - 13:44 | 2620896 Sutton
Sutton's picture

"I destroyed the bond market to save the bond market ."

Benjamin S. Bernanke

Mon, 07/16/2012 - 14:01 | 2620970 Bam_Man
Bam_Man's picture

FYI, his name is Ben, not Benjamin.

Mon, 07/16/2012 - 14:11 | 2621013 Random_Robert
Random_Robert's picture

If you want a way out....

 

http://www.youtube.com/watch?v=ilrubaXmaiU

Mon, 07/16/2012 - 17:08 | 2621760 Shigure
Shigure's picture

Bam_Man

I've often wondered, given that "Ben" in MENA countries means "son of ...", whether his name is actually the equivalent of "Junior" Bernanke

Mon, 07/16/2012 - 21:20 | 2622570 thegr8whorebabylon
thegr8whorebabylon's picture

BENjamim, 'son of my right hand'.  Changed from BENoni, 'son of my sorrow.' 

 

Mon, 07/16/2012 - 15:32 | 2621298 DanDaley
DanDaley's picture

The patient died, but the operation itself was a success. -Common surgeon refrain.

Mon, 07/16/2012 - 13:47 | 2620907 HardAssets
HardAssets's picture

Crap !  They didnt even make the chart numbers form a naked woman. What good are they anyway ?

Mon, 07/16/2012 - 13:51 | 2620922 Jena
Jena's picture

It isn't so much flattened out as it is ironed.

Mon, 07/16/2012 - 14:00 | 2620966 JLee2027
JLee2027's picture

Epic graphs.

Going to a pancake most certainly.

Mon, 07/16/2012 - 14:04 | 2620985 Bam_Man
Bam_Man's picture

How does anyone fund their retirement when US 10-year Note is yielding 1.45%?

And don't say "Save 25% of your after-tax income every year" because that ain't gonna happen.

 

Mon, 07/16/2012 - 14:09 | 2621003 NotApplicable
NotApplicable's picture

Flip 'em to the Fed and buy more?

Mon, 07/16/2012 - 14:21 | 2621055 MachoMan
MachoMan's picture

Clearly a good investment considering price increases for the vast majority of consumer items and necessities are less than 1.45%

Mon, 07/16/2012 - 14:34 | 2621092 Dr. Engali
Dr. Engali's picture

You don't. It's all part of the plan to take over 401k and Ira money. We( the government) will secure your retirement funds if you just turn them over to us.

Mon, 07/16/2012 - 14:52 | 2621174 Bam_Man
Bam_Man's picture

Yes, I suppose they will "promise you an annuity" in return. And since there will be nowhere else to go (since every insurance company will already be bankrupt) the people will gladly accept the offer.

Mon, 07/16/2012 - 15:36 | 2621322 DanDaley
DanDaley's picture

Just like they're doing in Argentina...whose name, ironically, means land of silver.  

Mon, 07/16/2012 - 14:05 | 2620990 Bear
Bear's picture

Paper is getting crushed

Mon, 07/16/2012 - 14:10 | 2621009 NotApplicable
NotApplicable's picture

But paper covers rock!

Mon, 07/16/2012 - 14:19 | 2621050 FieldingMellish
FieldingMellish's picture

Golden scissors cut paper.

Mon, 07/16/2012 - 14:22 | 2621060 MachoMan
MachoMan's picture

yes, but gold scissors can't cut paper gold...  yet

Mon, 07/16/2012 - 14:10 | 2621005 Random_Robert
Random_Robert's picture

Best. 

Chart Porn.

Ever.

 

 

 

 

Mon, 07/16/2012 - 14:23 | 2621070 JohnKozac
JohnKozac's picture

What will happen if people suddenly wake up and find the Yuan (or any alternative such as gold, platinum, etc) safer then treasuries as a store of value?

Mon, 07/16/2012 - 16:00 | 2621417 Alea Iactaest
Alea Iactaest's picture

We are now at the point where the opportunity cost for holding non-hypothecated hard assets (e.g., physical) is almost nil. Carrying and storage costs are easily managed. What's the plan to keep people from pusing capital into "non-productive" uses?

These assets must be perceived as risky for the general public by increasing volatility and destroying their repuation as a "safe harbor". But even these efforts seem unlikely to achieve the desired result as any decrease in price is either (i) temporary or (ii) relative since purchasing power is not destroyed.

Anyone worried about confiscation should probably read some of the more recent Executive Orders. At this point any asset, commodity or tangible good can be requisitioned by the federal government; there do not appear to be any meaningful exemptions.

I guess my point is that you're not going to find a hedge in government or corporate paper. Also, we know now that segregated accounts aren't. And we know that anything you own but which is not in your actual possession can be rehypothecated. If you're looking for return on principal, or even return of principal, these charts are more valuable than maritime charts to a sea captain.

Mon, 07/16/2012 - 14:36 | 2621107 fuu
fuu's picture

I'll be in my bunk.

Mon, 07/16/2012 - 14:53 | 2621177 bdc63
bdc63's picture

... I'll be in my bunker ..

Mon, 07/16/2012 - 15:31 | 2621295 Ungaro
Ungaro's picture

The prevailing historically low TSY yields are a global tribute to the solid credit worthiness of the USA and are in no way a result of interest rate manipulation by the Fed or anyone else. The TSY market is simply too big for that.

Gotta log off now, the nurse is coming with my evening meds and Napoleon is screaming in the bed next to mine...

Mon, 07/16/2012 - 15:46 | 2621307 ChacoFunFact
ChacoFunFact's picture

can you highlight the part where Bernanke raised rates 17 times in a row and Cramer had his no idea fit?

 

 

Mon, 07/16/2012 - 16:38 | 2621642 madcows
madcows's picture

How much of that drop is associated with QE twist?

The fed is trying to drive down long term borrowing rates to spur more borrowing. 

the 150 bps drop isn't from Joe blow retiree.  Maybe a little is from large hedge funds and pensioneers.  But I can't imagine anyone that would put a nickle of their money in any government asset.  Once Europe blows up, we're next.

Mon, 07/16/2012 - 18:14 | 2621999 blindman
Mon, 07/16/2012 - 18:14 | 2622001 DutchR
DutchR's picture

Stop feeding this tapeworm please....

Wed, 07/18/2012 - 14:24 | 2629245 SeniorD
SeniorD's picture

$urf's Up ...

or

The Perfect $torm

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