2s10s

Charting Treasury Reactions To Prior QE Episodes

Today the Fed may or may not announce a new outright dollar debasing venture, or may merely hint one is coming. And while the impact on stocks is pretty binary (post embargo, break stocks will either surge or slump) as very few are left trading equities, the real question is what will happen to rate and rate derivative products. Conveniently, Morgan Stanley's Igor Cashyn has compiled a historical analysis of how prior episodes of QE have impacted Treasury-based products. Igor looks at front and back-end rates, at curves, butterflies, swap spreads and agencies. Here are the results.

The Key Charts Entering Q4

Goldman charting guru John Noyce has taken some time off, so in his absence, here is his most recent compilation of charts as we enter Q4, with an emphasis on the EURUSD, AUDUSD (very rich here), EURAUD (and associated oscillation sentiment extremes), the 2s10s, bull flatteners, the S&P, The Shanghai Composite, and much more.

Daily Credit Summary: September 2 - Price Not Volume

Spreads compressed for the second day in a row modestly outperforming stocks as the big volume day from yesterday saw very little activity today as the path of least resistance appears higher for now. Intraday ranges today in credit were very narrow as what two-way flow there was seemed more concentrated in HY than IG for a change...Our super-short-term trading pivot is still long credit (from 111.5bps and 593bps for IG and HY respectively), stops never hit today and we would inch our stop to 110bps in IG and 590bps in HY but we get the sense that tomorrow's action will be early and extreme based on the NFP print. 112.25bps and 600bps are entry levels for the short credit should we run so not much room given the recent vol - and anxiety levels high into a long weekend. HY, IG, and the S&P all now closed above their 50-day averages so that offers some support for now but has offered little critical insight in recent weeks.

John Taylor Muses On A "Supermodel" World Whose Curves Are About To Get Even Flatter

FX Concepts John Taylor explains why as the deleveraging process becomes globalized, he expects global yield curves to "literally" flatten. He also explains why the Jackson Hole view that the Japan analogy is overdone, is wrong. Taylor does not go as far as Michael Pento to suggest that the Fed's next step will be to purchase equities, but its encroachment of the entire treasury curve means the "the Fed is already committed to purchase hundreds of billions of dollars of Treasuries just to maintain its current policy stance, we expect the persistence of weak labor markets to force it to launch “QE2”, further depressing back-end yields." Yet another addition to the "QE is imminent" bandwagon. The only question remains: will the formal announcement be the catalyst to go headlong into risk, and what will that mean for near-term inflation for items that really matter, yet are so conveniently ignored by the Core-CPI.

Goldman's Technical Update: Bearish, With An "Ultimate H&S Target Of 900"

In this week's update on technical chart formations, Goldman's John Noyce has nothing optimistic to tell clients. Noyce observes that while the market may have entered a short-term consolidation period with the 1,038-1,045, "looking further out the setup on the weekly charts of the S&P and the VIX, plus those for broader asset markets - fixed income in particular – make us think that a sustained bounce is unlikely and that broader risks remain on the downside." Yet the most interesting chart formation is the imminent flattening of the 2s30s... not here, but in the UK. Will the Julian Robertson "suicide" trade shift across the Atlantic?

Is Today's Bond Selloff Driven By Goldman's Announcement 2.50% Target On 10 Year Reached

While there is nothing to suggest a fundamental improvement in the economy, and judging by the latest batch of data the economy is in fact continuing to deteriorate, we have so far seen a substantial sell off in bonds across the curve, with the 2s10s steepening by 11 bps (just in time for the bull flattener bandwagon to enjoy some out-of-steepener rotation pain). So what is the catalyst for the selloff? Francesco Garzarelli's note to Goldman clients titled "Forecast Reached, Risks Now Balanced", in which he implicitly advises to take profits on USTs, sent earlier may provide some clues...

Guest Post: We're All In A Race To The Bottom

The political and economic environment is unfolding much as we discussed several months ago. Markets are being socialized and the government/central bank policies are meeting the problem of too much debt with more debt. But investors are beginning to see risk in a different light: The only "growth" is from stimulus, and how long can that last?... We're all racing to the bottom. There will be no winners, only non-losers as the government "spreads the pain." The non-losers will be those who have prepared: no or little debt and some savings for a rainy day (or decade). This was my only real advice for years.

2s10s Under 200 Bps For First Time Since April 2009, Curve Collapse Adds Fuel To Fire Of Macro Fund Implosion Rumor

The 10 Year continues to burrow ever deeper inside 250 bps, last seen at 2.46% or 8 bps tighter on the day, as now the Greek-Bund spread has blown up: did the fake stress tests buy Europe all of one month of time? A country fully backed by the faith and credit of the ECB is once again imploding - what can we say about the "faith and credit" of the ECB then? The only thing keeping the EUR from plunging at this point is the expectation that the Fed will (soon enough) print another cool $2-3 trillion. And the kicker, for Julian Robertson and whatever the macro hedge fund rumored to be liquidating (aside from the TRS which we pointed out yesterday), the 2s10s has just crossed inside 200 bps, the tightest the spread has been since April 2009. Since at least half the market players are still stuck holding on to steepeners, and are now about 30% underwater from the top 4 months ago, add 10x TRS-based leverage, and you can see why whatever fund is blowing up now won't be the last.

2s10s Prepares To Breach Key 200bps Support, As Curve Flattening Resumes With Feeling

The main (and lately only) bullish indicator that everyone seems to be focused on (for all the wrong reasons), continues to telegraph ongoing distressed for the financial segment: the 2s10s part of the Treasury curve has tightened to 206 bps (this was nearly 290bps a few months ago). At today's rate of flight to safety it is possible the key psychological (whatever that means - computers need therapy if Fib levels are brached?) support level 200bps will be taken out. This means all the leading indicators will soon reorient downward yet again, which also includes the ECRI LEI, which is once again due for an inflection point. And the recently far more critical from a funding standpoint, 2s10s30s butterfly, which we have discussed extensively as the primary carry driver of stock purchasing ability, has just gone double digit again.

Daily Credit Summary: August 23 - Low Volume, Low Range, Low Growth

Spreads closed marginally wider, at the worst levels of the day, after an anemic volume day that only picked up in activity when we weakened. Overnight angst from Australia combined with some weakness in EU data was marginally trumped early on by M&A chatter and headline spin on US ECO data but further evidence of a deflationary view of the world (NSC 100Y issue) seemed to provide some downward pressure and despite valiant attempts to steepen the curve or drive AUDJPY up, stocks ended at their lows of the day as did spreads at their wides.

We have had a number of clients asking about our views on the forthcoming GM IPO. Suffice it to say, and in the interests of brevity, we are not overly impressed and worry about this on many fronts as anything but a flipper's fantasy (drop us a line for somewhat more coherent thoughts). Most notably we have noticed something rather fascinating in the Auto sector. The relationship between GM's 2016 bonds and the Ford Equity price has been amazingly (and we mean incredibly) consistent for many months now - a simple arb at around 2.5x Ford's stock price explains huge amounts of variance in the GM bond price and we suggest tracking this going into the IPO for any signs of a preference. One we would expect is selling of Ford to buy into the GM IPO in hopes of flipping soon after and still leaving the manager equally exposed to the Auto sector - this would also be interesting as the GM bonds have residual ownership in the new GM and may be a decent hedge here should the deal be 'better' than many expected. Just thinking out loud on this but we will keep an eye on it.

Double Top Formation Suggests 2.2% Or Lower Yields For The 10 Year, 2.8% For The 30

While traditionally technicals have been considered voodoo by the vast majority of "legitimate" financial analysts, lately the trend has flipped, and scribbling that one is something as demode as a fundamental analyst tends to generate scowls of disapproval and outright disgust from PMs with a 10 second holding horizon during hedge fund interviews. Which is why looking at the chartist tea leaves, as Goldman's John Noyce has done, suggests that those looking for much more irrational exuberance in bond yields may get their wish, as a double top formation may be forming in 10 Years. The result of a broader double top would likely be an end target of between 2% and 2.2% in the 10 Year, and something potentially as low as 2.84% in the 30 Year, which would probably put all those with TBT exposure in the poor house.

Daily Credit Summary: August 17 - POMO you don't!

Spreads tightened across Europe and the US today with indices outperforming intrinsics thanks to rumors of JPY intervention and headlines proclaiming European sovereign fears over, the US recovery still in place, a 'coming' M&A boom, and the start of the Fed POMO encouraging risk-taking. The thinness of markets (given the summer slump and general lack of desire) enabled modest re-risking to move markets rapidly at the index levels across sovereigns, financials, and corporates in the US and Europe. The completion of the Irish and Spanish debt issues today seemed in and of itself enough to get everyone going (despite notably higher yields in the former and suspected 'help' from the ECB in both) and despite a major drop in German confidence, bond spreads and CDS compressed relative to Bunds with a feeling of squeeze to the move in SovX today - 9bps tighter vs 6bps intrinsics and leaving the index notably rich to intrinsics overall.

Morgan Stanley Strategy Slidepack

Attached is MS' most recent strategy slidepack covering European credit strategy, US rates (for those who just can't get enough of those 2s10s steepeners), credit strategy, and credit and equity derivatives. As the firm now has one the most bullish biases on Wall Street, the pack should at least provide those bearishly inclined with a sense of what not to do.

Bonds And Stocks Diverge Terminally As Steepeners Capitulate

The attempt to gun stocks despite a battery of bad news is so far succeeding, as risk is now diverging completely from yields and no correlations hold any longer. Those tempted to test whether any human correlation traders remain may play the convergence trade, but with this unprecedented amount of central planning in the market now, it would appear unduly risky. Yet one place where there is most certainly risk, is for job prospects of all those on the steepener bandwagon: the 2s10s has just hit 208 bps, as the steepener trade and the thousands of lemmings behind it are getting slaughtered. We eagerly anticipate the latest life support note from Jim Caron.

Visualizing The Past Of The Treasury Yield Curve, And Deconstructing The Great Confusion Surrounding Its Future

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. The confusion is further intensified by the sudden collapse in the 2s10s and the 2s10s30s butterfly. The odd thing here is that a flattening move as violent as recently seen in these two curves, has historically preceded a rise in the Federal Funds rate as can be seen in the chart to the right, before the Fed began tightening in 1999 and in 2004. In other words a flattening has traditionally been a leading indicator to an economic improvement (as liquidity extraction tends to go side by side with a pick up in inflation and thus economic growth). Alas, this time around, a tight monetary policy is the last thing on the Fed's mind, and the economy is only starting to demonstrate it is rolling over into a second and more violent recessionary round. In essence, the Fed's interventionist intention of purchasing the entire curve (including the long-end), as recently announced by the FRBNY, has completely dislocated all leading signaling by the curve itself. As a result, speculation is now rampant as to what may or may not happen. A case in point are the divergent opinions of Bank of America and Morgan Stanley. While the former Merrill Lynch is advocating an outright 10s30s flattener, Morgan Stanley is sticking to its guns and continues to push for a steeper curve: this in spite of the collapse in the 2s10s from a records steepeness of almost 290 bps in May, to under 220 bps as of Friday's close: the over 25% collapse is enough to blow up most of the funds who had positioned themselves for further steepness. At least Morgan Stanley is consistent. Yet both banks urge clients to hedge their trades and provide creative ways to do so, as both realize the likelihood of being wrong, now that the Fed is openly the biggest market participant, is probably higher than the inverse.