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US Treasury Curve 1990-2012 In Its Full 3-D Glory: Redux
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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Going down are we?
Are those graphics cool or what?!
Indeed, extremely cool.
+1 to Konrad, awesome animation.
Flatten the flag?
Seems appropriate.
Tyler, can you post the data?
Ah...paper covers rock!! no prob
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%"
I like them unadjusted better as there's less detail for people to argue over concerning their accuracy.
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?
How did you make those projections?
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?
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.
The Gold fixture holds the soon-to-be-worth-less-and-less toilet paper.
you must bank at the same Chase bank I do. not very soft or absorbent, but it gets the job done!!!
Beautiful.
A Masterpiece of graphical output. You can see all the recession foreshadowings (yield inversions) and easings. Esthetically very pleasing.
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.
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.
" 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.
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.
"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.
Behold the event horizon of the debt singularity... L O L
Can you show the same 3-d view for Japanese rates?
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...
LOL, kinda like an out of control SLINKY!!!!
What? No one wants to buy more debt, based on debt, paid for with debt, and backed by nothing?
gee, why not?
+ "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
Is your software able to display soon to be expected nominal NIRP territory?
btw: the maturity scale is slighty misleading.
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.
Very impressive but is there anyway you could depict this graph using a toilet bowl?
Now that you mention it, it DOES look like TP soaked in tidy bowl blue cleaner.
Or at least using toilet paper for the chart.
followed by hyperinflation (for items purchasable by banks with discount window access).
Exactly what are items purchasable by bank with discount window access?
A: Politicians and justice Inc.
Animate that chart....might get seasick.
I think I see Laird Hamilton in there.
There might really be Laird Hamilton waves if the charts went back another fifteen years...
Konrad - Cowabubga dude. Doing just fine 'til you rolled that thing backwards.
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.
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.
Could we have the same 3D graph for greece Tyler plz ?
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.
Looks like somebody stepped on a pile of wet cardboard.
Looks like sheetmetal after a car crash
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
let me know when both sides pancake.
"I destroyed the bond market to save the bond market ."
Benjamin S. Bernanke
FYI, his name is Ben, not Benjamin.
If you want a way out....
http://www.youtube.com/watch?v=ilrubaXmaiU
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
BENjamim, 'son of my right hand'. Changed from BENoni, 'son of my sorrow.'
The patient died, but the operation itself was a success. -Common surgeon refrain.
Crap ! They didnt even make the chart numbers form a naked woman. What good are they anyway ?
It isn't so much flattened out as it is ironed.
Epic graphs.
Going to a pancake most certainly.
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.
Flip 'em to the Fed and buy more?
Clearly a good investment considering price increases for the vast majority of consumer items and necessities are less than 1.45%
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.
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.
Just like they're doing in Argentina...whose name, ironically, means land of silver.
Paper is getting crushed
But paper covers rock!
Golden scissors cut paper.
yes, but gold scissors can't cut paper gold... yet
Best.
Chart Porn.
Ever.
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?
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.
I'll be in my bunk.
... I'll be in my bunker ..
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...
can you highlight the part where Bernanke raised rates 17 times in a row and Cramer had his no idea fit?
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.
The Amazing Yield Curve
http://www.youtube.com/watch?v=LZMfI5H7KCg
.
http://www.youtube.com/watch?v=DvAA36bbr4Q&feature=list_other&playnext=1...
Heartless Bastards - Parted Ways
.
Stop feeding this tapeworm please....
$urf's Up ...
or
The Perfect $torm