Fed Is Losing Billions, Wiping Out Profits That Funded Spending (Agency MBS Prices Falling While Duration And Convexity Soar)

As I told my Chicago, Ohio State and George Mason University finance and real estate students, repeatedly, “Watch out when The Fed begins to tighten monetary policy. It will be a bloodbath for taxpayers.”

Well, here we are. I argue that Biden’ green energy knucklehead policies are driving inflation, or it could be the insane level of Federal spending that Obama economist Larry Summers warned us about, or rising wages (in part due to Federal spending) is to thank for inflation. Or all of the above.

Regardless of the cause, the bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years.

Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales. The UK Treasury is already preparing to make up a loss at the Bank of England.

The Reserve balance has crashed into negative territory.

And Fed losses are skyrocketing.

Agency MBS prices are up today, but are down since August 2022. But risk measures duration and convexity are zooming upwards.

Deceleration Nation! US Home Price Growth Slows Most On Record In August As Fed Hits Brakes, But Still Growing At 12.99% YoY (US Treasury 10-yr Yield DOWN -17 BPS Today)

Alarm! US home prices are decelerating as inflation rages and The Fed tightens.

Home price growth in the US slowed the most on record as a doubling of borrowing costs (thanks to the US Federal Reserve) has sapped demand.

A national measure of prices increased 13% in August from a year earlier, but is down from 20.79% in March, the S&P CoreLogic Case-Shiller index showed Tuesday. That’s the biggest deceleration in the index’s history.

The housing market has started to slump as the Federal Reserve hikes interest rates to curb the hottest inflation in decades. Even with the deceleration, prices remain high compared to last year. Coupled with mortgage rates that are edging closer to 7%, many would-be buyers have been shut out, while some sellers have retreated. 

While 13% growth sounds good, it is not good for renters looking to buy a home.

According to S&P/CoreLogic/Case-Shiller, Southern (red) cities Atlanta, Charlotte, Dallas, Miami and Tampa all still grew at over 20% YoY. Other cities like blue cities Detroit, Minneapolis, Portland, San Francisco, Seattle and Washington DC are grew at UNDER 10% YoY.

It looks like some people have taken three steps and left blue states for red states.

On related news, I always said in my classes that +/- 10 basis point in the US Treasury yield is a big deal. This morning, the US Treasury 10-year yield is DOWN -16.1 bps. In fact, the 10-year yields are down across the board globally.

Its that smell of impending recession.

Well, they certainly aren’t calling Biden “The Breeze.” Except for the recession that is going to clobber the US.

‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown (Fed tighening to fight Bidenflation as a recession becomes imminent, Dow Futures UP 770 Points For Monday)

Things are getting interesting in DC, to say the least. The US is 100% likely to face a recession in the next 12 months while The Federal Reserve is on its crusade to fight inflation caused by … The Federal Reserve, Biden’s green energy shenanigans and massive, irresponsible Federal spending that even Former Obama economist Lawrence Summers warned would cause inflation. So what will The Fed do? Lower rates and expand their assets purchases to fight the impending recession OR keep tightening to fight Bidenflation? But where we are now is that the fixed-income market could be in big, big trouble.

According to MarketWatch, the world’s deepest and most liquid fixed-income market is in big, big trouble.

For months, traders, academics, and other analysts have fretted that the $23.7 trillion Treasuries market might be the source of the next financial crisis. Then last week, U.S. Treasury Secretary Janet Yellen acknowledged concerns about a potential breakdown in the trading of government debt and expressed worry about “a loss of adequate liquidity in the market.” Now, strategists at BofA Securities have identified a list of reasons why U.S. government bonds are exposed to the risk of “large scale forced selling or an external surprise” at a time when the bond market is in need of a reliable group of big buyers.

“We believe the UST market is fragile and potentially one shock away from functioning challenges” arising from either “large scale forced selling or an external surprise,” said BofA strategists Mark Cabana, Ralph Axel and Adarsh Sinha. “A UST breakdown is not our base case, but it is a building tail risk.”

In a note released Thursday, they said “we are unsure where this forced selling might come from,” though they have some ideas. The analysts said they see risks that could arise from mutual-fund outflows, the unwinding of positions held by hedge funds, and the deleveraging of risk-parity strategies that were put in place to help investors diversify risk across assets.

In addition, the events which could surprise bond investors include acute year-end funding stresses; a Democratic sweep of the midterm elections, which is not currently a consensus expectation; and even a shift in the Bank of Japan’s yield curve control policy, according to the BofA strategists.

The BOJ’s yield curve control policy, aimed at keeping the 10-year yield on the country’s government bonds at around zero, is being pushed to a breaking point.

Well. Bidenflation certainly isn’t helping, but Statist Economist and Cheerleader Janet Yellen can’t bring herself to blame green energy policies, rampant Federal spending or irresponsible Federal Reserve policies for the crisis.

You will note the differences between today and the financial crisis of 2008-2009. The financial crisis gave us a massive surge in government securities liquidity thanks to then Fed Chair Ben Bernanke imitating Japan’s Central Bank and buying US government securities. Fast forward to today and the liquidity index hasn’t budged much since 2010 (except for a little blip around the Covid Fed intervention of early 2020), but we are now seeing near 40-year highs in inflation and a barely declining Fed balance sheet. And M2 Money YoY (mostly commercial bank deposits) are crashing.

I am guessing that The Fed will pivot given that stock futures are way up for Monday. The Dow Jones mini is up 770 points and the S&P 500 mini is up 88.75 points.

Bond market futures (specifically the US Ultra Bond) is down for Monday, meaning yields will be climbing.

While perusing MarketWatch, I noticed this headline from the uber-attention whore Nouriel Roubini: “New Yorkers are ‘stupid’ for moving to Texas, Florida: Wall Street’s ‘Dr. Doom’.” Seriously? Nouriel, you aren’t talking to friends in a Bleeker Street bar. Like Bernanke.

I remember giving a speech at The Brookings Institute in Washington DC. Talk about stranger in a strange land. One person who I was debating got frustrated and said “You are such a … Republican!!!” As if that was the worst slur he could throw at me.

Great Reset?? US Treasury 10yr Yield Tanks -20 Basis Points (UK 10yr Tanks -24.1 BPS)

As I frequently told my investment and fixed-income securities students at Chicago, Ohio State and George Mason University, any 10 basis point change in the US Treasury 10-year yield is significant.

But how about today’s 20 basis point decline in the US Treasury 10-year yield?

The UK’s 10-year yield is down even more at -24.1 basis points. Germany is down -18 bps and France is down -10.3 bps.

Speaking of credit default swaps, Credit Suisse is back to financial crisis levels while UBS and Deutsche Bank are not … yet.

And gold jumped $28.5 dollars today as POP goes the yield.

With all the turbulence in markets thanks to the war in Ukraine and Biden’s green energy mandates and spending (not to mention Statists like Klaus Schwab screaming about a Great Reset), I was reminiscing about more simple times.

Sink The Bismarck! German 10yr REAL Yield Plunges To -7.89% (US REAL 10yr Yield At -4.43%)

Sink The Bismarck! Or at least sink the German economy.

Between going green and the war in Ukraine, Germany is seeing economic distress (high inflation) and a -7.89% Real 10yr yield. At least the US is seeing “only” a -4.43% REAL 10yr Treasury yield.

Like the US, I wonder who in Germany studied game theory? That is, going green leaves nations vulnerable to foreign nations oil and natural gas supplies. Like Russian natural gas.

The Nash equilibrium is a decision-making theorem within game theory that states a player can achieve the desired outcome by not deviating from their initial strategy. In the Nash equilibrium, each player’s strategy is optimal when considering the decisions of other players.

Unfortunately, the US and Germany have deviated from the initial strategy are are paying dearly with skyrocketing energy prices. Particularly as we enter the winter season.

So, who blew up the Nordstream natural gas pipeline going from Russia to Germany?

I can take a guess.

Wipe Out! $32 TRILLION In Stock Value Wiped Out (US Core Deflator Rises To 4.9% Prompting Taylor Rule Fed Target Rate Of 9.65%, We Are Currently At 3.25%)

Wipe out!

$32 TRILLION of global stock value has been wiped out since December 2021.

Today’s core PCE deflator reading of 4.9% YoY shows that the inflation surge is not over. With a core PCE deflator of 4.9%, the Taylor Rule suggests that The Fed Funds Target Rate should be at 9.65%, far below its current level of 3.25%. So, IFF The Fed is following any sort of rule, rates should continue to soar.

And if we use headline inflation of 8.30% YoY, the Taylor Rule suggests hiking the target rate to 14.75%.

After yesterday’s dismal Q2 report of -0.6%, I fully anticipate a recession. Ain’t this a kick in the … head.

Mortgage Applications Shrink To Lowest Level In 25 Years As Mortgage Rates Cross The 7% Rubicon (Refi Apps DOWN 84% YoY, Purchase Apps DOWN 29% YoY)

Alea iacta est (the dice is cast).

Mortgage applications have fallen to the lowest level in 25 years, in part due to The Federal Reserve’s tightening of monetary policy in an attempt to combat inflation.

Mortgage Net Daily is showing that 30-year fixed mortgage rates are 7.08%.

Mortgage applications decreased 3.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 23, 2022.

The Refinance Index decreased 11 percent from the previous week and was 84 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 0.4 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 29 percent lower than the same week one year ago.

More On Worst Bond Bubble Burst Since 1949! US Yield Curve Inverts To Lowest Since 2000 (US Mortgage Rate Climbs To 6.59%, UP 129% Under Biden)

And I thought the Washington Commanders QB Carson Wentz getting sacked nine times in a game against his former team was bad!

We start the week with another chapter of “The Worst Bond Bubble Burst Since 1949.” This time its the US Treasury 10yr-2yr yield curve inverted to its lowest level since 2000.

Then across the pond, the UK sovereign yield curve is also inverted. But this curve is only inverted to 2008 levels of The Great Recession. The UK 2-year sovereign yield is up over 50 basis points this morning.

Then we have the US Dollar Swaps curve (green line), steeply UPWARD sloping until 6 months, then declining. The same goes for the US Treasury Actives curve (blue line), except that is it steeply upward sloping out to 1 year then begins declining.

And then we have the Bankrate 30-year mortgage rate rising to 6.59%, up 129% since Biden was sworn-in as President.

Also declining since Powell unleashed his monetary Panzers on the economy and financial markets are 1) agency MBS and 2) S&P 500 index.

The stock market’s value is down $7.6 trillion since Biden took office.

When I saw Carson Wentz of the Washington Commanders getting sacked 9 times, I thought maybe Prince Harry was playing instead. Or maybe Meghan Markle.

Price Harry is on the left, Commanders QB Carson Wentz is on the right.

Behind The Curve! US Headline Inflation 8.5% Is Far Ahead Of Fed Target Rate 2.5% (Eurozone Is In Similar Situation 9.1% Inflation Versus 0.75% Deposit Rate)

The Federal government reaction to the Covid outbreak in early 2020 included massive monetary stimulus, Federal government spendathons and Biden’s green energy policies have resulted in a sizzling 8.5% inflation rate (update on Monday morning).

The problem is that The Federal Reserve is far behind the inflation curve with their target rate at only 2.5%. And The Fed’s balance sheet remains near $9 TRILLION in assets held.

In Euroland, we are seeing a similar problem (Frankfurt, we have a problem!). The Eurozone inflation rate is at 9.1% while their version of The Fed Funds Target rate is only 0.75%, a large catch-up gap.

If we look at the Taylor Rule for the US using headline inflation, we see that The Fed needs to raise their target rate to … 21.72% to crush inflation.

In Euroland, the problem is similar. At 9.10% inflation, the ECB will have to raise their version of The Fed’s target rate to 16.80% to combat inflation. As if that will happen in either the US or Euroland.

On a different note, is it my imagination or does US Democrat Senate candidate from Pennsylvania John Fetterman look like the alien from the flick “Battleship”?

Fetterman is the top picture.

Here is a video of the Fetterman/Dr. Oz debate … if it ever occurs.

What M2 Money Growth Says About US Employment Numbers (Job Creation Will Likely Slow As Fed Removes Monetary Stimulus, REAL Hourly Earnings YoY Are Declining)

Joe Biden is the king of malaprops. But his press secretary is just as bad as her boss. Recently, she said that under Biden, there were 10,000 million jobs created. Better known as 10 BILLION jobs created. Not bad, considering that the total population of the US is 333 million. THAT is a hot labor market! /sarc

But seriously, the US U-3 unemployment rate is 3.7% in August, the lowest since Donald Trump was President and BEFORE the Covid outbreak. The Covid economic shutdown saw a surge in the unemployment rate to 14.7% in April 2020 that begat a huge spike in M2 Money growth (22% YoY in May 2022 (green line). Only now is M2 Money growth returning to Trump-era growth rates.

But as The Federal Reserve removes its hefty monetary stimulus, it is unlikely that the unemployment rate will remain low.

In defense of Biden’s press secretary, the US economy saw 10.247 million jobs added under Biden (although while technically correct, even MSNBC wouldn’t give Biden credit for job creation in his first several months as President. Check that. They probably would.

April 2020 saw a decline in US jobs of -20.493 million jobs thanks to the Covid economic shutdowns. BUT with the M2 Money surge, we saw +12.1 million jobs added between May and November 2020 under Trump. Then the US elected China Joe (or Beijing Biden) as President.

The economic shutdowns due to Covid were an economic disaster for millions. But the surge in M2 Money (supporting the various Federal spending programs and inflation) explains the surge in jobs added, not economic wizardry of Biden.

For some reason, Biden and his press secretary failed to mention that inflation is so bad that REAL average hourly earnings YoY are declining at a 3% pace.

And not surprisingly, job growth has accrued to big corporations and not small businesses.