Trader: "The Probability Of 10Y Yields Collapsing Is Much Higher Than Most Realize"

One day after he correctly warned that equities have not yet bottomed - just hours before the Dow Jones tumbled from up over 200 to down over 400 points at one point as the tech sector imploded - this morning former Lehman trader and current Bloomberg macro commentator Mark Cudmore issues another warning, this time about Treasuries, which he thinks may be poised for a sharp spike higher as yields tumble. He explains why in his latest Macro View column below:

Treasuries Jump May Be the Start of Something Bigger: Macro View

The probability of Treasury 10-year yields collapsing is much higher than most investors seem to realize. The readjustment in pricing may be just getting started.

It’s not going to take too much for serious discussion to begin over the possibility the Fed’s hiking cycle may be at an end, or near an end, already.

This doesn’t even need to become the base case for yields to slump, it just needs to become a plausible- enough outcome for the market to squeeze out the large speculative short position in Treasuries.

The building blocks for this narrative are already in place. Thursday’s PCE inflation data may provide the required catalyst.

Financial conditions have tightened considerably in the last two months. Libor spreads have widened significantly -- because of structural issues -- but that still acts as effective policy tightening.

Trade, politics and commodities are all going to start weighing on the growth outlook. The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment, which has remained a bright spot in U.S. data, and the wealth effect.

As the manufacturing center for so much that the U.S. consumes, China’s PPI has had an excellent correlation with U.S. CPI in recent years. The former is still trending down after both measures peaked in February 2017. The March data for both is due April 11. Given how industrial metals and agricultural prices have slumped this month, there are strong reasons to expect China PPI to slide again.

The technical break lower in yields was made Tuesday. Fundamentals are supportive of the move. Positioning is offside and therefore any related corrective adjustment will quickly add downside momentum to yields.

Tomorrow brings February’s PCE data, supposedly one of the Fed’s preferred inflation measures. The consensus forecast is for the core number to climb to 1.6% year-on-year. That paltry rate of inflation would still be the highest since since March last year.

A miss of just 0.1 of a percentage point and investors will start considering the possibility that inflation may already have peaked, and hence perhaps so has the Fed’s rate-hiking cycle. That would put the cat amongst the short Treasury pigeons (positions).


TheSilentMajority Wed, 03/28/2018 - 06:21 Permalink

Only an inflation-denier would agree that the CPI is 2%.

True CPI is close to 9%. As such, real interest rates are actually around NEGATIVE (7%).

Time to jail inflation-deniers!!!!

new game Arnold Wed, 03/28/2018 - 06:53 Permalink

when deflated collateral comes, then the shit hits the fan. until then asset striping in the form of theft via inflation.

healthcare by laws that "take" labor from peoples that have no say. comply or go without. asset stripping seen at the paycheck first and deductible if the policy is actually used. pretty simple shit. trump did what? what happened to healthcare? oh, right, trump fuked some bimbo with uuuge tits...

the narrative, russia phobia for extinction for 400. game show mentality. i'll take bimbos for 100. game show host:what president had a cigar while she was on her knees. same as it ever was. one big distraction and it works. same with inflation. voices that will never be heard. democracy at it's worst...

In reply to by Arnold

Mementoil Arnold Wed, 03/28/2018 - 07:08 Permalink

Just imagine what would happen to the dollar if the Fed is truly at the end of the hiking cycle. The dollar has been extremely weak in spite of rate hikes. If the Fed has to reverse course - the dollar would implode! Gold would skyrocket!
People are simply not prepared for such a scenario.

In reply to by Arnold

Arnold Mementoil Wed, 03/28/2018 - 07:18 Permalink

My thinking is that the Fed and the Satellites are letting things roll, so that the balance sheet and overbought assets can go back into the market.

QE won't be called QE this next time, but being able to cut overnight rates will be the same...

We all travel the same path, not because it is the best way,
mostly because it is familiar.

In reply to by Mementoil

davatankool TheSilentMajority Wed, 03/28/2018 - 06:38 Permalink

OMG, another one fall into the wallst trap. You are right in a grand picture that inflation keep raising and eventually kill us. recently inflation is not sustained b/c we are in the econ. depression. the recent raise inflation was due to irrational consumer spending, and oil price, take a deeper look at those data, they are not sustained. please, dont fall into wallst's false narrative. I agree fiat currency will be worthless, hidden inflation is higher than official stated. but most price are or will be deflationary. consumer spedning will fade as credit and loan growth in contraction along with oil prices. look at the personal income, wage(both keep missing expectation), record household/credit card debt and saving, they will tell you its deflationary in the future. 

yield will crash to 2.3%, fed will probably only hike one more time or not after the recent one.

yes, inflation in the long term, but deflation is whats happening now, short-mid term.

In reply to by TheSilentMajority

ktown davatankool Wed, 03/28/2018 - 11:39 Permalink

Interest on excess reserves holds short rates stable  while long rates collapse inverting the yield curve causing a negative feedback loop which destroys production? The potential of main street is being used to continue the activity of throwing good Fiat after impaired legacy assets on the federal reserve balance sheet?

In reply to by davatankool

Decoherence TheSilentMajority Wed, 03/28/2018 - 08:43 Permalink

If the Feds walked away right now and stopped meddling in the market, what would happen?  We'd spiral into the worst depression the world has ever seen.  So obviously deflation is the dominant force, despite the fact they've had some success creating inflation.  Most of that inflation went into the stock market, bond market, and real estate from excess bank reserves.  But now take a look at what the Feds were shooting for in creating a rising yield curve from the 2-5 yr to the 10-30 yr.  The yield curve flattened, so what is the market telling you?  a) the Feds failed miserably with their inflation agenda and b) deflation is still the dominant force.  We've been in a depression since 2000.  The Feds wanted low yields on short term debt so banks don't have to pay any interest and higher yields on long term debt, so when banks go out into the market for mortgages, etc. they can charge you more interest.  That's the banker's wet dream.  But what happened?  Exactly the opposite.  Because the economy is terrible and the fact that the 30 yr is still where it's at tells the story.  The Feds are trying to create self-sustained inflation, but it's a fools errand.  They've failed and will keep failing.  You can’t target a specific inflation number with massive deflationary forces at work.  They either let the depression kick off or do something stupid that dethrones the USD even faster.  I personally believe they already know this, but what else can you do at this point besides pretend you have a magic wand? Pretend and extend.  That's all we've got left.    

A true reserve currency can never really hyper-inflate.  Because that country can simply export their excess inflation to other countries and make their children starve.  China understands this, which is why they are pushing the petro-yuan.  And with all their debt, they are at risk of becoming the next Japan.  If China succeeds, and we are no longer the dominant reserve currency, then you'll see the inflation you're talking about and then some.  Hyperinflation is caused by political events, such as this, not money printing.  All countries are printing money, but the US forces other countries to stockpile more USD reserves when we drive up asset prices, so it offsets our excess money supply.  

With all that in mind, the frustration levels at the Fed have to be rising and the probability of them doing something incredibly stupid goes higher by the day.  If they do, then anything is possible.  



In reply to by TheSilentMajority

moonstears Decoherence Wed, 03/28/2018 - 10:24 Permalink

Decoherence said**"A true reserve currency can never really hyper-inflate.  Because that country can simply export their excess inflation to other countries and make their children starve"

You must expound upon this, please. Those wayward dollars can fly home. That IS inflationary + velocity of money= hyper-inflationary. International commerce via the web, at the least, could send them home, in light of any Govt ban on international purchases, if that's what you think would avoid a hyper-inflation.

In reply to by Decoherence

Decoherence moonstears Wed, 03/28/2018 - 11:27 Permalink

Hyperinflation is having too much of your own currency in circulation (in your own country) chasing goods on the street.  When we debase our currency and drive up asset prices, what happens?  All the other countries in the world must go into the market and buy more USD to purchase goods to get into their country.  But the problem is they have to use their weaker currency to buy more expensive USD, thus creating the inflation in their own currency because they can't really afford them.  Or they want to manipulate their currency for cheap exports, e.g. China.  That's the reason China has so much debt is because they've been buying more expensive USD and paying their companies in cheap Yuan, printing the difference.  Countries like Brazil tried to give us the finger and stop playing the game and look what happened to them.  There is no escaping it, UNLESS a country like China succeeds at forcing another option, like the petro-yuan.  In the past, we'd just send the Marines to your door step if you tried to create viable alternative.  But with China, this simply isn't an option.  Even our sociopaths aren't that crazy...let's hope anyway.   

But back to your point.  Without cheap energy, there is no economy.  Cheap oil is what makes an economy.  All the other stuff you're talking about isn't amounting to much.  If it were, then why are dollars disappearing in our borders?  Without digressing, think about the fact our energy companies are over 4T in debt trying to keep the cheap energy coming.  We're bleeding out.  We still need heavy crude to mix the light crude we're extracting and all the cheap oil everywhere has peaked.  There is plenty of low grade shit if you're willing to go into debt to fish it out.  All of it equals the end of the USD hegemony, but for now deflation is the biggest risk until either a) a country like China creates another alternative to the petrodollar, b) the market wakes up to the fact we're bleeding out and cheap oil is a lie, or c) the Fed does something incredibly stupid to erode all confidence in the USD.  Until one or all of those scenarios play out, deflation is the biggest risk.   


In reply to by moonstears

snblitz TheSilentMajority Wed, 03/28/2018 - 13:08 Permalink

A number of suppliers at Home Depot and Lowes have started putting 4.75 gallons in their 5 gallon buckets of construction material and 0.9 gallons in the 1 gallon cans.

In reply to by TheSilentMajority

davatankool Wed, 03/28/2018 - 06:24 Permalink

told ya, inflation not happening!

inflation trade will reverse.

wallst make you think inflation is happening to take your money.

we are in the econ. depression


Smerf Wed, 03/28/2018 - 06:25 Permalink

Disinflation is a good thing, we should be cheering it.  AI, solar panels, Teslas, Facebook advertising.....all of it is deflationary.

davatankool Wed, 03/28/2018 - 06:51 Permalink

Its so hard to believe so many ppl fall into inflation narrative when they are anticipating a slowdown, credit crisis and recession.

Even with recent job growth which is I believe its real but its temporary, wage not growing as expected. its an obvious deflationary sign.

consumer outspend themself and even dig into their saving (record low)

where will the inflation come from? yes raising asset price! 2016-7, housing price in some place around the world double. they are expected to slowdown this year.


everything is deflation or will be so.

whoever downvoted my comment, lets take a bet. this year, yield wont break 3.0%.


I bet it will trade within this range - 2.3%

if wasnt for the trump's policy and deficits, the yield will crash below 2.0% 

other countries debt issue are worse than US and their currencies are not resev currency. USD could be in danger, we will face USD crisis during or after the coming economic crisis.



ElTerco Wed, 03/28/2018 - 06:55 Permalink

"The slump in equities may soon be significant enough to be a concern for the Fed because of the impact on consumer sentiment"

I think he meant Overlord sentiment. Consumers get up in the morning and do the same thing everyday. Overlords fire consumers and scale back business when their EPS is not large enough to reap a multi million dollar increase in the value of company stocks they hold.

D.T.Barnum Wed, 03/28/2018 - 07:02 Permalink

The great thing about being an armchair economist, is that even random guesses will have a better success rate at making predictions than professional establishment economists, who seem to be wrong like 95% of the time.

moonstears D.T.Barnum Wed, 03/28/2018 - 12:18 Permalink

Economists are often "right", or honest, before they're visible. Go back and look at OLD early essays, and articles by Greenspan(type gold), Elizabeth Warren (no sarc, general econ brilliant before she was a politician, and economics IMO), even Krugman (type gold), NOT Kidding. It's as if to be establishment you MUST tow the line, sadly. 

In reply to by D.T.Barnum

Decoherence moonstears Wed, 03/28/2018 - 19:53 Permalink

The ones that tell the truth usually get converted into duplicitous scumbags in short order.  Plus the truth is too depressing.  You can't make it as a politician until you can sell bullshit to a cattle farmer.  We pay sociopathic scumbags to lie to us.  They send bullshit downhill and we give them our power in return for their bullshit.  It works brilliantly.  Then we can carry on with our lives remaining pathologically optimistic that our politicians actually care about the commoners.           

In reply to by moonstears

davatankool Wed, 03/28/2018 - 07:05 Permalink

Recently many indictors/signs are saying a selloff or bear market is coming. the data around the world is rolling over. There is only one ingredient is missing for a big selloff, its the raising dollar. as everything is pointing to the deflation, a raising dollar will kill all the asset speculation, a giant risk off signal waiting to happen. if you are seeing dollar is blasting higher, this is a sign stocks will down 1k+ pts (of course yield will have to stay down too)



buzzsaw99 Wed, 03/28/2018 - 07:19 Permalink

and if the 10Y yield had gone up instead of down yesterday cudmore would be saying the exact opposite this morning.

any way the wind blows doesn't really matter...

Truth Eater Wed, 03/28/2018 - 07:19 Permalink

Everyone talks about inflation/deflation/sell-off/rate increase....  with no substance.  People speculate on speculation.  How about just look at how things work.  There is no raising of rates at the Fed.  They just stop buying up the piles of sloppy unwanted bonds so their prices don't crash.  What sane person would want to buy bonds now? 

backwaterdogs Wed, 03/28/2018 - 07:21 Permalink

Dammit, I just bought 300 oz of bullion


They were convinced inflation was coming...they even said that is why equities crashed in Feb.

Now equities crash in March due to flight to treasuries?  What in the actual.fuck.?

buzzsaw99 Wed, 03/28/2018 - 07:23 Permalink

with the ioer rate locked onto the overnight the fed raising the ffr has the exact opposite effect it did in previous eras.  how can they say they are tightening, by giving the maggot bankers moar?

Money_for_Nothing Wed, 03/28/2018 - 09:30 Permalink

Why can't the Fed/US-Treasury make the 10Y T yield what they want? Who can stop them? Why would they stop raising the yield? As long as taxes grow faster than yield they are Golden. World has to eat US inflation or lose US Market share. China starts losing trillions if they continue to dump in the US. Trump wins.