Bond Yields Blowing Out

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machinehead's picture
machinehead
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Bond Yields Blowing Out

Something wicked is happening in the Treasury market. Check out the chart of the 5-year note yield:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fvx&sid=0&o_symb=fvx&freq=1&time=8&x=0&y=0

If you take the 12-month high of 2.76% and the 12-month low of 1.016%, the halfway point is 1.888%. As of today, the 5-year yield has blown through the halfway point to the upside, now at over 1.91%.

Same is true for the 10-year note. The halfway point of the wide annual range is 3.17%. The 10-year note reached that yield yesterday, and blew through it today -- now at over 3.30%. The chart:

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=fvx&sid=0&o_symb=fvx&freq=1&time=8&x=0&y=0

It would be fair to say that this market action leaves Bernanke's QE2 plan to lower rates in tatters. The same damned thing happened with QE1 in March 2009 -- rates dropped 50 basis points on the announcement, but within six weeks had blasted higher. But Ben's the kind of guy who, having burnt his fingers on the stove, decides to stick his whole arm in the oven on the second go-round. That's what a Princeton edumacation will do for you! The silk-lined dunce cap is included in the tuition. The elegant Latin inscription, translated, reads: 'Me PhD! Me horny!

The news background for this action is the proposed tax cut extension. Whether successful or not, stimulative US policy is in dramatic contrast to Europe's sackcloth-and-ashes austerity, in which busted economies such as Greece and Ireland are slashing spending even harder, as the starving poor rattle their tin cups. On a relative basis, US growth in 2011 is likely to trounce Europe's. Although the US dollar has structural problems of its own, it looks good in comparison to the euro, which is in danger of cracking up.

Dollar strength and rising real interest rates are no friends of precious metals. Gold futures printed a key reversal yesterday, and followed through today. This could be the start of an intermediate correction.

I doubt that sharply rising rates are good for stocks, either. December is supposed to be a seasonally favorable time of year. But objective factors such as the rising interest rate trend are unfriendly. And the S&P looks like it's double-topping at the 1225 level. Santa may skip Wall Street this year, or deliver it a well-deserved lump of toxic, carcinogenic coal.

As Business Week used to say (way back in '79, he cackles), Death to Equities! Laughing

Farmer Brown's picture
Farmer Brown
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Re: Bond Yields Blowing Out

MH, questions:

When yields go up, shouldn't that be highly negative for stocks?  Increased borrowing costs to corporate america should not bode well for earnings.  Also, with bond yields going up (and whether this is a major trend reversal or not remains to be seen), don't stocks have to perform better just to keep up on a valuation basis?

Needless to say, yield-less metals will get socked (at least I'm hoping they do so I can stock up). 

I love the fact  that every time our clueless Count R. Feiting tries something, the exact opposite happens.  If only we could convince him to try and tank the economy, maybe good things would happen.

 

 

machinehead's picture
machinehead
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Re: Bond Yields Blowing Out

The only reason why rising yields wouldn't be negative for stocks is if deflation fears prevail. That's an abnormal condition, but during parts of 2008 and 2009, bond yields and stocks rose and fell in lockstep.

However, if the reason for rising yields is optimism about economic growth, then deflation fears should be receding. In that case, the normal relationship should prevail, and rising yields would be a negative for stocks.

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Re: Bond Yields Blowing Out

I can't help wonder about the affect on Gold. GLD had a head and shoulders chart and Gold takes a big hit. JPMorgan shorted some more and seems to get away with what ever they want. No matter if someone from the CTFC criticizes or not. From the worry of the unkown in congress easing, to China raising their currency. Bonds rising. After reading about all the manipulation in the markets and things I haven't a clue about and I do read a lot, seems that no matter what-the moron cheerleaders from TV, tell everyone to sell gold; it's in a bubble!

Stopped trying to figure out the next step in the markets and just go long on silver........

 

machinehead's picture
machinehead
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Re: Bond Yields Blowing Out

From Michael Ashton:

Even though the [10-year note] selloff is “only” 90bps or so, in relative magnitude that is comparable to the roughly 3% selloff from 7.20% in March 1987 to around 10% in October 1987 (I don’t remember what happened next). So 90bps is a big move, in the context of ultra-low rates (and concomitantly long durations).

href=/comment/560#comment-560

Stocks have been remarkably complacent about rising interest rates. Hell, even bonds have been remarkably complacent about Wildman Ben's QE2 twin-turbo printing program. But markets have a way of waking up and taking notice eventually ...

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Re: Bond Yields Blowing Out
machinehead wrote:

The only reason why rising yields wouldn't be negative for stocks is if deflation fears prevail. That's an abnormal condition, but during parts of 2008 and 2009, bond yields and stocks rose and fell in lockstep.

However, if the reason for rising yields is optimism about economic growth, then deflation fears should be receding. In that case, the normal relationship should prevail, and rising yields would be a negative for stocks.

I can't see why stocks would "celebrate" a spreading deflation fear - deflation implies lower revenues and decreased margins resulting in lower profits.  Sorry lost my head - I forgot that fundamentals went out the window with antenna whipping raccoon tails.  In today's world deflation fear means more gravy from the Fed gravy boat. 

Personally I've always viewed rising yields as inflationary.  You are raising the cost of money which probably has a much more direct impact on your expenses than say a rising cost of oil.  I think this is perhaps even more true during a period such as we have now where lenders are scrutinizing borrowers with a magnifying glass and the numbers of those who are capable and willing to borrow has dramatically shrunk as opposed to the "good times" when rising rates are used as a "brake" on the economy.

Perhaps this sell-off was a reversal more based on the rising prospects of the tax cut extensions getting passed which in theory may take away from the likelihood of QE III popping up.  After all we don't want to over stimulate ourselves to death - just until we go blind.

In today's world, investment houses have relegated their fundamental analysis department to one desk behind the boiler in the basement.  That desk is equipped with a single line black rotary phone, 2 pencils. a pad of paper, hand crank adding machine and a rusted teletype. The mo-mo TA analysts department is staffed with thousands of fresh faced financial engineering graduates all provided with a 6 screen display and 10GB feeds.  I would guess that what we are seeing is more of the thundering herd syndrome which has absolutely no regard for traditional inter-market relationships as that would require thinking.  And who has time to think when trades are nanosecond events.

One things for sure Bernankes stated goals for QE are blowing up in his face.

 

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Re: Bond Yields Blowing Out

My grocery store is selling gold and silver now....one stop shopping for toilet paper, twinkies, beer, and American Eagles.

Good Grief Charlie Brown.

MH, in your experience as a trader, have you ever seen a market as ridiculous as this one? Seriously, were the 70's this weird?

machinehead's picture
machinehead
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Re: Bond Yields Blowing Out
yobob1 wrote:

One thing for sure Bernankes stated goals for QE are blowing up in his face.

Doug Short is with you on that one. And he's got charts to prove it. 

The [chart] represents the percent change in each of seven maturities since the November 3rd FOMC press release announcing the details of the latest round of quantitative easing (aka QE2). The increases are absolutely stunning. Imagine, for example, buying a 3-year Note only to discover that, had you delayed a month, the yield would have been 115% higher yield.

As of this morning the bankrate.com survey of mortgage overnight averages puts the 30-year fixed at 4.91% versus 4.24% when the Fed announced QE2. That's a 15.8% rate increase.

http://dshort.com/

Central planner Ben is finding out that day-trading the gigantic US economy, even with an unlimited 'free money' margin account, is not as simple as he thought. 

But like many newbie novice traders, Ben demonstrates a distressing tendency to want to double down. He's from the government, and he's convinced that he can just steamroller the market into submission.

Long-term, the more QE you do, the higher rates go. Rates cannot be driven down (other than temporarily) using freshly-printed currency, because it's inflationary. 

JAG, markets are always weird, but some times are weirder than others. The high inflation of the 1970s was eventually brought under control. But for awhile there, it looked like it might just run away into hyperinflation.

Farmer Brown's picture
Farmer Brown
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Re: Bond Yields Blowing Out

The only way prices go down is if there is more sell volume than buy volume; and conversely the only way they go up is if there are more buyers than sellers.  I know that is dumb-nubbingly obvious, but based on that simple truth, what the coincidence of the bond "collapse" with the QEII announcement tells me is this:  Even with the Fed on the Buyer's side of the equation, there are still more sellers of US govt debt than buyers.  That's an undeniable, mathematical fact based on the price movement.

The only question is why?  Before the Fed announcement, bonds were holding on to their low yields and had been doing so for some time.  How can it be that after a major buyer enters the equation that all of a sudden there are more sellers?  It is as if, no, scratch that - it is apparent that the Fed's decision brought more sellers to the table.  Like some monetized version of Schrodinger's cat,  their own actions change the base conditions they were seeking to affect even before they've really done anything.

For what it's worth, among other theories that have already been put on the table, I would venture to guess that as most government intervention programs, the Fed picked the exact wrong time to load up on Treasuries.  Private holders of US gov debt, who have been shaking in their underpants after having partaken in 10 or 30-yr bond purchases yielding laughable returns, are taking advantage of this "gimme" and are unloading their positions onto the Bernanke while they know they can.  The danger of course (especially for Count R. Feiter) is that bond yields rise so much that they then start to get dumped by people who had not even been thinking of unloading them onto the Bernanke in the first place.

Will be extremely interesting to see how this plays out in the coming weeks.

nickbert's picture
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Re: Bond Yields Blowing Out
JAG wrote:

My grocery store is selling gold and silver now....one stop shopping for toilet paper, twinkies, beer, and American Eagles.

Good Grief Charlie Brown.

Is this bullion your grocery store is selling, or is it jewelry?  On one hand this would seem a huge move in the public perception of gold, but on the other you DO live in Texas.  Them Texans just got to do things different  Wink

Shoot, I can count the number of coin shops that sell bullion in Alaska on one hand.  An accident-prone woodshop teacher's hand, no less.

- Nickbert

JAG's picture
JAG
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Re: Bond Yields Blowing Out

Its actually an independent business renting space within the grocery store. It looks like most of their business is buying jewelry and such, but they buy and sell bullion too. I'll take a picture next week when I make the grocery run and share it here.

r101958's picture
r101958
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Re: Bond Yields Blowing Out

I believe the money that knows shows. It shows us where real monied interests think the problems will start. Check where the yields diverge.  Yields not increasing and then increasing a lot. I believe in between that time bracket is where the people 'in the know' think our economy will encounter the unfixable systemic issue. Right now this particular fortune teller signals a crisis at between 1 and 2 years out.

 

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Reverse Mortgage Rates

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