Calm Before The Storm? Treasury 'Risk' Hits 45-Year Low As Shorts Hit Record Highs

Having killed the Japanese bond market, some are wondering if central bank interference has finally slayed the US Treasury market, as its numbness to news suggests a zombie-market-walking.

The 10-year Treasury yield has moved less than 9 basis points so far in July. After retreating from its May 17th high of 3.1261%, the benchmark yield has hovered between 2.8053% and 2.8950% in July...

Putting it on course for its smallest monthly range since 1973....

In price-terms, the realized volatility of 10Y US Treasury Futures prices for the last 30 days is the lowest since 1998!

As Bloomberg notes, Ian Lyngen, a strategist at BMO Capital Markets, said in a note this week that he’s fascinated with how unresponsive the yield has been to new information and “our sense is that something dramatic is nearing on the horizon.

And given the fact that there has never been a bigger speculative short position across the Treasury complex...

We suspect the max-pain trade would be a yield collapse.

We wonder if the catalyst will somehow be China?

Comments

Haus-Targaryen Fri, 07/20/2018 - 02:56 Permalink

Sorry Tyler I dont buy it. See, the powers that be cannot let anything major change which might affect the current financial system's ability to continue as a "going concern."

Thus they'll print whatever is necessary, have Belgium purchase another 40% of its nominal GDP in USTs in a 4 month period again and generally manipulate things to keep the thing going. 

What ultimately kills the system will be something out of nowhere which "goes exponential" before TBTB can stop it.

Arnold any_mouse Fri, 07/20/2018 - 06:18 Permalink

Yeah, plausible Haus.

I'm thinking of some sort of terrorist nuclear release in a financial district.

Although costly, accidental catastrophic release experience has been well tamped down.
Conventional demolition in the financial district (911) was a temporary detour / slowdown only, though wholey effective in changing perceptions.

In reply to by any_mouse

CorporateCongress Arnold Fri, 07/20/2018 - 06:52 Permalink

The FEDs can't allow the rates to rise too fast. Not only will the loss on those massive bond portfolios hurt, the cost of debt rise, but perhaps even more so these bonds are also used as collateral against margin calls. If these bonds drop, more have to be delivered against the margin calls or positions need to be unwound. Shit could hit the fan big time.

In reply to by Arnold

Arnold CorporateCongress Fri, 07/20/2018 - 07:05 Permalink

Much of what you say is traditionally true.

The Fed, unless there is a sudden swerve, projects its' irritating jabs pretty well, so it can be baked into, say a quarter or halves worth of data.

My traditional view of general interest return is 5%.
It is a vestige of the era in which I grew up.

Can we agree that free money and rolling over loans /bonds continuously is not healthy.

In reply to by CorporateCongress

Uchtdorf Arnold Fri, 07/20/2018 - 07:51 Permalink

Since the end game is a single worldwide currency, the elites are very happy to crush the US$. Therefore, trying to judge what they'll do by any rational set of actions or by "tradition" is a waste of time and evidence of recency bias. Never in history has there been a fiat currency that lasts forever. The elites always over-inflate in the end. So what would you do if you knew the dollar was dying in a year? In 6 months? Or whenever the NWO wants it to die?

 

Isn't this ZeroHedge? The answer is: Gold, brethren, and silver, for the win.

In reply to by Arnold

arkel Fri, 07/20/2018 - 03:00 Permalink

"We suspect the max-pain trade would be a yield collapse."

Sure. Why not? Fed doing QT and raising interest rates, but yields will go lower...

This market already makes no sense, why not throw in crashing yields when they should be pressured higher?

 

nathan1234 Fri, 07/20/2018 - 03:06 Permalink

I think we are looking at the unwinding of the Chinese Treasury Holdings. After all this is Chinese savings to offset any loss

Coming on the heels of the Russian divestment of Treasuries it makes more sense.

O C Sure nathan1234 Fri, 07/20/2018 - 03:26 Permalink

On the one hand there are lots of shorts and on the other hand the are lots of good reasons to be short. Wait, that's the same hand. On the other hand...
I still like that the trend is down (from the July 2016 top through the Sept 2017 high) and if one is unsure then who's your friend? A large loss of these record shorts on a move into this resistance or through it ought to be the tell.

In reply to by nathan1234

Harry Lightning nathan1234 Fri, 07/20/2018 - 03:27 Permalink

If the Chinese were unwinding even a portion of their Treasury holdings, one would expect yields to rise. Heck, the Russians sold 100 billion and ten year yields move 30 basis points...can you imagine if the number were more like half a trillion ? 

Although, to be a devil's advocate on this, if and when the Chinese ever decide to offload a significant portion of their holdings, that paper probably never hits the market. The Fed will buy it directly and put it on their own balance sheet, rather than see yields rise a hundred or more points across the curve.

The real story in all this is why have longer term yields stayed so calm despite a US economy running on all cylinders and pushing up inflation measures. As a corollary, who has been on the buy side of all these short positions ? Its a very strange situation, which in and of itself is keeping speculative investors out of the market for the rightful fear that some government somewhere is manipulating the price of US Treasuries so as to prevent them from rising and killing off a level of present economic activity not seen since before the financial crisis.

I think the bigger lesson to be learned for investors is that if the Treasury market is being manipulated somehow by the US government or one of its proxies, investors should consider whether they want to continue underwriting a massive US debt that gets larger by the minute and probably will not be paid off ever except in grossly inflated dollars. For even if today's manipulation is working in the favor of the buy and hold crowd, any government that manipulates its government bond prices and keeps them from falling as inflation rises is truly performing no favor for the investor.

But here again, the primary problem spawns a handful of tangential problems. Even if you decide to stop investing in the US Treasury market, what's the alternative ? The European Central Bank is an even larger manipulator of its sovereign debt across the EU, and they even have the nerve to include the corporate market in their price fixing schemes. The Japanese and Chinese have mountains of debt almost if not worse than the US, and the rest of the world's sovereign debt markets do not have the capacity to absorb the amounts of capital currently devoted to G7 sovereign debt.

Its certainly not a winning proposition to be invested in any of these debt markets anywhere, which probably helps to explain the bullet proof nature of most European and the US equity markets.

The shame of all this is that markets exist in part to bring discipline to politicians. But to avoid having their feet held to the fire, governments everywhere have flooded their financial markets with nearly free money, which makes it almost impossible for fund managers not to take advantage of this government largess. And so some of the most ridiculously over-valued bond and equity markets in the world continue to trade at prices far above their fundamental value, and yet no amount of selling seems to make a dent in the price-fixed veneer of the securities that trade therein.

Its probably a good time to devote investment capital to commodities markets, which have seen a resurgence of activity now that government bond markets have become so barren,

In reply to by nathan1234

Madolf Sanders… Fri, 07/20/2018 - 03:49 Permalink

The b&b trading algos don't want treasuries to move down, because they'll lose a lot of money (shorts win), & no one want to buy them because the fed has telegraphed higher-future interest rates. It's a war between the central bank and the investment banks. To help the investment banks the cb will have to either scare the shorts to close somehow, or directly funnel more money to the ib's. The IOER has risen from .5% to 1.95% since the election so far.

https://www.federalreserve.gov/datadownload/Chart.aspx?rel=PRATES&serie…

Pitty Fri, 07/20/2018 - 04:54 Permalink

Nope, this time the crowd is right, yields will explode up as too many forces are converging, why on earth would one buy 10-30 year paper when they can get nearly the same yield for 1-2 yr, demand will continue to wane for the long end

Harry Lightning Pitty Fri, 07/20/2018 - 06:02 Permalink

The answer to your question is that short term yields will not stay this high once the economy slows down. Recall that in the early 1980s, one year bills traded at near 20% while long bonds yielded but 14%. Why the inversion ? Because the market did not believe that short term rates would stay that high for long. Its also why there has been a huge, and by my estimation premature, yield flattening trade that has gripped the US Treasury market for the last six months or longer. 

And on top of that, I think there are more than a few investors who are hedging the bet in the stock market, insofar as longer dated note and bond yields would fall should equity prices make a well-deserved correction of 10-20%.

In reply to by Pitty

Pitty Harry Lightning Fri, 07/20/2018 - 09:21 Permalink

Sure if the economy slows in a big way but that is not happening any time soon, common sense: massive debt + long term yields at record lows, I am gladly and patiently short, the reversion to the mean is coming and when it turns it will be violent, everyone is overthinking this,  all the sovereign global debt will be killed, near zero rates for long duration, yours!

In reply to by Harry Lightning

Dewey Cheatum … Pitty Fri, 07/20/2018 - 08:53 Permalink

Wrong. Rates on the long end are down, because huge sovereign funds are BUYING those bonds.

That's why, when the yield curve moves toward inversion, that says big money sees no growth and is hunkering down in long dated USTs. [major recession indicator]

Their bet is this; as rates end up going lower [and will], these bonds will be worth more.

Ps.. they will never let the crowd be right

In reply to by Pitty

overmedicatedu… Fri, 07/20/2018 - 05:24 Permalink

some how the elite will get richer as bonds hit the shitter..the ave investor, well good luck..

as hank paulson just said..we saved the little guy, by giving massive bonus checks to wall street.. see how that works Larry?

turkey george palmer Fri, 07/20/2018 - 07:32 Permalink

The rules on money markets allow them to break the dollar value. And gate the exit for awhile.  So of your firm has it's cash in a money market find that gates redemptions you don't get paid.  Rotsa ruck

Ron_Mexico Fri, 07/20/2018 - 09:59 Permalink

yeah, but what always happens in a zombie movie?  You think the zombie is finished, and then it sneaks up behind you and takes a big chunk out of your neck.

MrSteve Fri, 07/20/2018 - 18:15 Permalink

Apply classic hedge strategies: gold vs. bonds. If gold is held down, then bonds and related currency are held up. Confidence would appear to be high in bonds if rates are low. When you have less confidence in repayment, you charge a higher rate.

 

It all works fine until liquidity dries up, either in an unregulated eurodollar market for bank-traded quadrilions of interest-rate based derivatives or short term loans in yuan. Both markets are broken and broke and who can know what wallpaper currency will exist after the bust. Who has gold and who has bonds? Is faith really growing in bondholders’ assessments of sovereigns and corporates to be able to make good on promised payments? The concept of full faith in guaranteed certificates of purchasing power confiscation is an expensive oxymoron to experience.