Posts Tagged ‘yields’

Bear Flattener in Treasuries Continues; Mortgage Rates Climb

Bear Flattener in Treasuries Continues; Mortgage Rates Climb

Courtesy of Mish 

Curve Watchers Anonymous has a quick update on US Treasuries.

click on chart for sharper image

The yield curve is flattening, in a bearish way. A Bull flattener would be when yields are dropping across the board with yields on the long end dropping more than the short end.

In this case, 5-year and 10-year yields are up about 45-50 basis points from the low just after QE II started, while yields on 30-year treasuries are up only about 30 basis point.

Daily Snapshot

You can see this easily in a daily snapshot from Bloomberg.

click on chart for sharper image

As I have pointed out before, this action is not at all usual. It is an artifact of everyone front-running the Fed’s announcement of Quantitative Easing purchases, then selling the news.

Yields are higher across the board than in August when the Fed first hinted at another round of QE.

Mortgage Rates Climb

Curve Watchers Anonymous also points out that mortgage rates are on the rise

Mortgage rates are a quarter point higher than a month ago and back to where they were three months ago, even as housing slips further into the gutter. Please see Bernanke Claims QE II will Create 700,000 to 1 Million Jobs; Where? Mexico, Peru, China for more on mortgage applications and mortgage rates.

Mike "Mish" Shedlock


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When the Levee Breaks

When the Levee Breaks

Courtesy of Joshua M Brown, The Reformed Broker 

stocks, bonds

Here’s a riddle:

What happens when an extra half trillion dollars that has been shoe-horned into bond funds decides it’s getting a horrific return, sees the 10% rally in dividend-paying equities and decides to switch asset classes?  What happens when this mass asset class transfer happens not in an orderly manner, but in a rush – between say October and the holiday season?  Specifically, what happens to the stock market?

Katrina happens, Esse.  People hanging in tree branches, pickup trucks lying sideways on the rooftops of buildings, Indonesian tsunami stuff.

A biblical flood-tide of misallocated cash leaves the 1.5%-yielding short-term bond market and comes sloshing back over the transom into the equity market.  You may have already gotten a whiff of this hurricane-tide in the first two weeks of October.  Bears are mistakenly referring to it as "just another Risk On moment".  It is becoming much more than a moment.

The plunge into bond funds over the last two years has been epic; $350 billion in inflows in 2009, 2010 is on pace to see another $300 billion.  This ocean of money predominantly came into these funds at the short-end of the yield curve and is currently earning a sclerotic rate of return that is dwarfed by "real" inflation (you know, like food prices, energy and stuff that matters in real life).

According to Morningstar, the pace of the out-of-stocks/into-bonds trade that has been so dominant all year is slowing.

From Morningstar via the WSJ:

Overall, long-term (bond) mutual funds saw inflows of $14.28 billion during September, lower than August’s $16.81 billion

I would not be surprised to see this trend continue and then reverse itself entirely as investors look at the paltry yields they’ve signed on for and begin reallocating back toward their forsaken stock funds again.  And because we’re Americans, despite our much-mythologized "rugged individualism", we tend to stampede like a delirious herd.  Because this is the case, I also wouldn’t be surprised to see this move happen en masse.

Just a heads up – the more agile among us may want to start paddling their surfboards in front of the right wave now. 

******

When the levee breaks/led zeppelin


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MORE BUBBLE TALK

MORE BUBBLE TALK

Courtesy of The Pragmatic Capitalist 

Oil being poured into water, studio shot

It’s becoming increasingly popular to describe the U.S. government bond market as a “bubble.” As I’ve previously explained, this strikes me as totally nonsensical for several reasons – the primary reason being that the term simply is not applicable to an asset in which you receive your entire principle back at maturity. The term “bubble” implies a grossly mispriced asset that is susceptible to substantial losses. If the instrument is used as intended there should be little to no risk of principal loss in a U.S. government bond.  And given the weak economy and constant need for government intervention it is no surprise that investors are seeking a safe haven such as bonds.

Aside from all that, Credit Suisse recently published an interesting piece of research arguing the same point – that the U.S. bond market is not a bubble.  They noted that the price action in government bonds is very different from historical bubbles:

“We note that the price action of bonds it is very different from the bubbles in other asset classes we have seen over the last 30 years. The six-month US bond return is 1.9 standard deviations above norm, compared to an average of 5.9 standard deviations during previous bubbles.”

So you can see the price action is not even remotely similar to the great bubbles in history.  If investors continue to use government bonds as they are intended (for instance, don’t make a 10 year loan with the intention of demanding your money back in 10 minutes), diversify across bond markets and generally allocate bonds as they are intended (as a hedge against other higher risk assets) then there should be very little risk of you ever experiencing a catastrophic loss such as those seen after many of the great bubbles of the last 30 years. 


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QE Engine Revs, Car Goes Nowhere

QE Engine Revs, Car Goes Nowhere

Courtesy of Mish

The economy is stuck in neutral so stepping on the QE gas pedal is highly unlikely to accomplish much except increase the noise level. Yet, the philosophy at the Fed seems to be, if gas doesn’t work, give the engine more gas.

So the engine continues to rev louder and louder, and treasury yields drop, but that does not and will not put Americans back to work.

5-Year Treasury Yields at All-Time Low

Curve Watcher’s Anonymous notes Treasury Five-Year Yields Near Lowest Since 2008 Before Auction

Treasuries rose, pushing five-year note yields to the lowest level in almost two years before today’s auction, as a drop in consumer confidence spurred bets that the Federal Reserve will increase debt purchases.

Bonds also advanced as an official said the Bank of England should step up quantitative easing and Standard & Poor’s said the price of bailing out nationalized lender Anglo Irish Bank Corp. could exceed $47 billion

“The engine is revving, but the car is going nowhere,” said Thomas L. di Galoma, head of U.S. rates trading in New York at Guggenheim Capital Markets LLC, a brokerage for institutional investors. “It’s the combination of QE and a possible QE2 in England. You’ve got some sovereign-debt problems, which is also sending a safe-haven bid into Treasuries.”

Yield Curve Weekly Close

Providing unneeded liquidity may or may not help asset prices (please see Sure Thing?! for a discussion) but if quantitative easing helped the real economy, at some point yields would stop falling.

Clearly the Fed has no clue as to what to do, but it wants to "do something". The only thing the Fed can think of doing (or is willing to do) is have another round of quantitative easing, so the Fed eases whether it makes any sense or not.

The amazing thing here is talk of "Sure Things" regarding equities, with treasuries universally despised.

Of course it is no "Sure Thing" for treasury yields to drop either, but arguably it is more likely given the economic engine is stuck in neutral.

The simple fact of the matter is increased borrowing power or lower interest will not cause businesses to expand. I have discussed this point at length in


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Curve Watcher’s Anonymous Investigates the Question “Is the Bond Bull Dead?”

Curve Watcher’s Anonymous Investigates the Question "Is the Bond Bull Dead?"

Courtesy of Mish 

Curve Watcher’s Anonymous is looking at various long-term and intraday charts of treasuries and the stock market following Tuesday’s FOMC meeting.

$TNX: 10-Year Treasury Yield Intraday Chart

Click on any chart to see a sharper image.

Note the initial spike higher in yields right on the announcement. This headfake is very typical of FOMC announcements.

SPY: S&P 500 Index Shares Intraday Chart

As with treasuries, the S&P 500 had an initial spike that quickly reversed. Both charts show fat tails.

Ultimately the rally failed (which would be typical given the flight to safety trade in treasuries).

Every FOMC meeting it seems we get the same fake reaction: The first move is typically a false move. Sometimes there is a double fake, but only rarely does the initial move keep on going. I would be interested to see comments on this.

Given that I seldom concern myself with intraday or even short-term action however, the more serious question is "Where to from here?"

2-Year Treasuries vs. the S&P 500

The pattern may not continue, but for quite some time rising treasury yields have generally been directionally aligned with rising equities. In three instances (the first three red boxes), a drop in treasury yields preceded (led) a subsequent drop in equities. The fourth box (where we are now) is unresolved.

2-Year Treasuries – Monthly Chart

Two year treasury yields have fallen to a record low, yet stocks have been rising.

5-Year Treasuries – Monthly Chart

The all time low in 5-year treasury yields is but a stone’s throw away.

10-Year Treasury Yields – Monthly Chart

New lows in 10-year treasury yields are in sight.

To help put things into perspective here is a weekly chart of $TYX 30-year treasuries, $TNX 10-year treasuries, $FVX 5-year treasuries, and $IRX the 3-month treasury discount rate. The other symbols are yields.

$TYX, $TNX, $FVX, $IRX Weekly Chart

The chart depicts weekly closing values.

Is the Bond Bull Over?

Judging from 2-year treasuries or 5-year treasuries, pronouncements of the "death of the bond bull" were certainly premature. Moreover, given how weak the economy is, I think it is odds-on the 10-year treasury note touches if not breaks the previous yield lows.

Only the 30-year long bond yield seems reluctant to drop. It may not…
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The Low-Interest-Rate Trap

The Low-Interest-Rate Trap

Courtesy of John Rubino of Dollar Collapse 

Cannon Beach, Oregon, USA

Pretend for a second that you recently retired with a decent amount of money in the bank, and all you have to do is generate a paltry 5% to live in comfort for the rest of your days. But lately that’s been easier said than done. Your money market fund yields less than 1%. Your bond funds are around 3% and your bank CDs are are down to half the rate of a couple of years ago. Stocks, meanwhile, are down over the past decade and way too volatile in any event. If you don’t find a way to generate that 5% you’ll have to start eating into capital, which screws up your plan, possibly leaving you with more life than money a decade hence.

Now pretend that you’re running a multi-billion dollar pension fund. You’ve promised the trustees a 7% return and they’ve calibrated contributions and payouts accordingly. But nothing in the investment-grade realm gets you anywhere near 7%. If you come up short, the plan’s recipients won’t get paid in a decade or – the ultimate horror – you’ll have to ask the folks paying in to contribute more, which means you’ll probably be scapegoated out of a job.

In either case, what do you do? Apparently you start buying junk bonds. According to Saturday’s Wall Street Journal, junk issuance is soaring as desperate investors snap up whatever paper promises to get them the yield they’ve come to depend on. Here’s an excerpt:

‘Junk’ Bonds Hit Record

U.S. companies issued risky “junk” bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets.

The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.

Corporate borrowers with less than investment-grade ratings sold $15.4 billion in junk bonds this week, a record total for a single week, according to data provider Dealogic. The month-to-date total, $21.1 billion, is especially high for August, typically a quiet month that has seen an average of just $6.5 billion in issuance over the past decade.

For the year, the volume of U.S.


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What Bond Bubble?

What Bond Bubble?

Girl Playing with Bubbles

Courtesy of Rom Badilla of Bondsquawk.com

Interest rates have rallied tremendously in recent months as concerns of an economic slowdown and the potential for a double dip weigh on the minds of both Wall Street and Main Street.  Since early April, which marks the recent high in rates, the long-end of the curve has rallied significantly.  The yield on the 10-Year U.S. Treasury has declined more than 100 basis points to 2.97 percent during that time frame.

That type of change usually takes many months, if not years, to accomplish.  The average implied volatility of both interest rate swaptions and options on Treasuries over the last 10 years is around 100-120 basis points on an annualized basis.  Hence, the move to where we are now is quite significant.

Admittedly, part of the decline is attributed to a flight to quality due to fears of contagion from Greece and the European debt crisis.  However, the last leg of the drop in yields was due to signs of a slowing economy and declining price pressures.  If it were a continuation of the flight-to-quality trade, we would have seen the dollar appreciate as was the case earlier when the Euro approached parity as sovereign risk escalated.  Lately with the recent string of weak domestic economic data, the dollar has declined 1.7 percent from June 21 while the 10-Year rallied 26 basis points and pushed below 3 percent.

If there’s any argument that there is a bond bubble, keep in mind that there needs to be an imbalance, i.e. a shift in outlook toward lower rates.  Basically, the majority of the world needs to be on one side of the boat, where tipping over is a possibility and the imbalance is ultimately rectified.  Right now, we are far from that.

According to Bloomberg’s economic and interest rate survey, market participants still expect higher rates to materialize with the Federal Reserve raising rates in early 2011.  In additions, forecasters expect the 10-Year to increase 40 basis points to 3.37 percent by the end of the Third Quarter.

 

Bloomberg Economic Forecasts

Rate hawks and bond vigilantes are still advocating for higher rates as the U.S. grapples with both perceived higher inflationary expectations fueled by future economic growth and higher fiscal deficits.  To be honest, after packing on the calories by downing countless hotdogs and…
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Mad Hedge’s Global Market Comments

Global Market Comments
Courtesy of Mad Hedge Fund Trader

October 5, 2009

SPECIAL “I TOLD YOU SO” ISSUE

Featured Trades: (TBT), (BRAZIL), (EWZ)

1) For the last six months there has been a great big whopping contradiction in the markets. The stock market has been discounting a return to the “Roaring Twenties,” while the bond market has been anticipating another “Great Depression.” After yesterday’s publication of the Labor Department’s September nonfarm payroll number showing the loss of another 263,000 jobs, it looks like the bond market now has the upper hand. This takes the unemployment rate up 0.1% to 9.8%, and total job losses for this recession to 7 million. The really disturbing aspect of this number is that 57,000 teachers were fired, as states chop budgets to the bone. This is really eating our seed corn by the bushel full. Of course, I have been banging pots and pans, setting off distress flares, and yanking the fire alarm, trying to alert readers that this kind of disappointment was coming (click here for “Risk Reversals Can Be Such a Bitch” and here  for “Stocks Offer No Value”). Shares have dropped 5% from last week’s peak, as the bond market soared, the ten year yield reaching nosebleed territory of 3.05%. The dollar maintained its flight to safety status, which to me is one of the great ironies of all time. It’s like that reprobate, alcoholic uncle with the bad teeth, who, when your car breaks down in the middle of a downpour in a bad neighborhood, will always let you crash on his sofa. Let’s call him your Uncle Sam. You have to hand it to PIMCO’s inveterate card counter, Bill Gross, who says this is all about transitioning to a “new” normal of 1%-2% real GDP growth. That’s why he was loading the boat with bond yields at 4%, a “ballsey” move at the time, which now smells like roses. I guess that’s why they call him the “Bond King.”
 

    jobless1-4.jpg picture by madhedge     
 
 
2) In light of the disappointing September nonfarm payroll figures reported yesterday, I’m afraid that my recommendation to buy the Proshares Ultra Short Treasury Trust (TBT), a bet that US Treasury bonds are going down, is starting to look a little green around the gills. I


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Zero Hedge

Global Auto Industry Collapse Continues As October EU Data Shows No Relief

Courtesy of ZeroHedge. View original post here.

The outlook for the global automobile market has been increasingly dire lately, especially after a third quarter that saw sales drop in many major markets across the globe, including China. Now, the latest data from Europe suggests that the difficulties may be nowhere close to over despite optimistic fourth quarter guidance by companies like Volkswagen and Daimler AG. 

Deliveries...



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Phil's Favorites

Life in South Africa's economic hub is improving -- but big challenges remain

 

Life in South Africa's economic hub is improving -- but big challenges remain

The Gauteng City-Region is home to a quarter of South Africa’s population. Mark Momberg

Courtesy of Julia de Kadt, Gauteng City-Region Observatory and Alexandra Parker, Gauteng City-Region Observatory

More than 14 million people live in South Africa’s economic hub, the Gauteng City-Region. That’s 25% of the country’s population.

A lot of media reporting and public discussion about Gauteng i...



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Kimble Charting Solutions

Gold Bugs; Would Love This To Be A Double Top!

Courtesy of Chris Kimble.

Gold, Silver, and the precious metals industry have a pretty simple relationship with the U.S. Dollar: They perform better when the Dollar is weakening… and they tend to struggle when the Dollar is strengthening.

One of our favorite ratios to monitor for Gold Bugs is the U.S. Dollar/Gold ratio. It tells us when the Dollar is weakening or heading lower (which is good for gold) or when it is strengthening or heading higher (bad for gold).

Looking at the Dollar/Gold chart below, we can see that the ratio climbed higher from late 2011 to early 2016. This wreaked havoc on Gold prices. Since peaking in early 2016, the ratio has formed a broad declining channel (pink shaded area). Each swing lower has provided a tailwind for Gold prices, while each counter-swing higher has been a headwind.

in ...



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Insider Scoop

Macy's Receives Mixed Analyst Reaction After Q3 Earnings Beat, Sales Miss

Courtesy of Benzinga.

Related M Big Box Bonanza: Walmart Beats Most Estimates, But Brexit Could Steal Attention Mid-A...

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Members' Corner

NY Times: OPERATION INFEKTION

 

This is a three-part Opinion Video Series from NY Times about Russia’s meddling in the United States’ elections as part of its "decades-long campaign to tear the West apart." This is not fake news. Read more about the series here.

OPERATION INFEKTION

RUSSIAN DISINFORMATION: FROM COLD WAR TO KANYE

By Adam B. Ellick and Adam Westbrook

EPISODE 1

MEE...



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Chart School

Weekly Market Recap Nov 11, 2018

Courtesy of Blain.

This past week was saw another positive move up by bulls – especially in the Dow and S&P 500; the NASDAQ was not quite as enthusiastic.   Wednesday’s rally was on the legs of an election that was seen as market friendly or at least not as bad as it could have been.   Essentially – paying people a lot of money to get nothing done the next 2 years – woo hoo!

The market is interpreting Wedneday’s result as insuring that “no big things will get done,” in Washington between now and 2020, Craig Birk, chief investment officer at Personal Capital told MarketWatch. “The market appreciates the relative certainty of the slow legislative agenda.” he said.

“As President Trump plans his 2020 reelection campaign, a gridlocked Congress is unlik...



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Digital Currencies

Bitcoin's high energy consumption is a concern - but it may be a price worth paying

 

Bitcoin's high energy consumption is a concern – but it may be a price worth paying

Shutterstock

Courtesy of Steven Huckle, University of Sussex

Bitcoin recently turned ten years old. In that time, it has proved revolutionary because it ignores the need for modern money’s institutions to verify payments. Instead, Bitcoin relies on cryptographic techniques to prove identity and authenticity.

However, the price to pay for all of this innovation is a high carbon footprint, created by Bitc...



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ValueWalk

Vilas Fund Up 55% In Q3; 3Q18 Letter: A Bull Market In Bearish Forecasts

By Jacob Wolinsky. Originally published at ValueWalk.

The Vilas Fund, LP letter for the third quarter ended September 30, 2018; titled, “A Bull Market in Bearish Forecasts.”

Ever since the financial crisis, there has been a huge fascination with predictions of the next “big crash” right around the next corner. Whether it is Greece, Italy, Chinese debt, the “overvalued” stock market, the Shiller Ratio, Puerto Rico, underfunded pensions in Illinois and New Jersey, the Fed (both for QE a few years ago and now for removing QE), rising interest rates, Federal budget deficits, peaking profit margins, etc...



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Biotech

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Reminder: Pharmboy is available to chat with Members, comments are found below each post.

 

Gene-editing technique CRISPR identifies dangerous breast cancer mutations

Breast cancer type 1 (BRCA1) is a human tumor suppressor gene, found in all humans. Its protein, also called by the synonym BRCA1, is responsible for repairing DNA. ibreakstock/Shutterstock.com

By Jay Shendure, University of Washington; Greg Findlay, ...



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Mapping The Market

Mistakes were Made. (And, Yes, by Me.)

Via Jean-Luc:

Famed investor reflecting on his mistakes:

Mistakes were Made. (And, Yes, by Me.)

One that stands out for me:

Instead of focusing on how value factors in general did in identifying attractive stocks, I rushed to proclaim price-to-sales the winner. That was, until it wasn’t. I guess there’s a reason for the proclamation “The king is dead, long live the king” when a monarchy changes hands. As we continued to update the book, price-to-sales was no longer the “best” single value factor, replaced by others, depending upon the time frames examined. I had also become a lot more sophisticated in my analysis—thanks to criticism of my earlier work—and realized that everything, including factors, moves in and out of favor, depending upon the market environment. I also realized...



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OpTrader

Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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Promotions

Free eBook - "My Top Strategies for 2017"

 

 

Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:

 

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All About Trends

Mid-Day Update

Reminder: Harlan is available to chat with Members, comments are found below each post.

Click here for the full report.




To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...

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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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