Speculators Increase Short Treasury Futures Position (But Gold LONG Positions Increase)

Speculators are increasinng Treasury short positions while speculators are favoring long positions in gold futures.
Speculators increased net short positioning throughout the Treasury futures curve in the week ended April 9. The bulk of the moves came from adding short positions in 10-year (TY) Treasury futures contracts. They increased their short position in TY contracts by $56,982. And they added some short risk to their two-year (TU) futures positions, after nearly cutting that position in half the previous week.

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Speculators also increased their short positions in five-year (FV), ultralong (WN) and classic 30-year (US). Speculators still remain short every Treasury futures contract.

How about gold? The net futures have actually increased since December.

 

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Bubble Monster! Central Bank Continued Surrender Leading To Declining VIX, Reduced VIX Positions And Rising SMART Money Flow Index

As I wrote at the beginning of The Fed’s quantitative easing (QE)  ventures back in 2008, The Fed will never be able to “normalize” monetary policy. As we have seen, The Fed has all but quit rate hikes and has annoucned end an to QT (quanitative tightening) in the Fall.

In celebration of the eternal Central Bank monetary stimulus, S&P500 volality (VIX) is collapsing … again as VIX Futures open interest is shrinking. Accordingly, the SMART Money Flow Index is rallying as investors see Central Bank surrender.

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The global Central Bank asset purchase bonanza!!

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Coupled with low rates.

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The Fed and other Central Banks are contuning to run their bubble machines!

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Here is a video of The Federal Reserve.

Wipeout! Hidden Bond Market Dangers Expose Traders to $2 Trillion Wipeout

Wipeout! 

(Bloomberg) — Behind the rally in global debt markets lurks a disaster just waiting to happen. At least, that’s what some long-time market watchers are warning.

While dovish comments by the Federal Reserve and other central banks have prompted investors to pile back into bonds, two troubling developments could make buyers uniquely vulnerable to deep and painful losses, they say. One is the sheer amount of ultra-low yielding debt, which means investors have almost no buffer in the event prices drop. That’s compounded by the worry liquidity will suddenly evaporate in a selloff and leave holders stuck with losses on positions they can’t get out of quickly.

Granted, nobody is actually predicting when things will turn ugly in the bond market, and history hasn’t been particularly kind to the doomsayers. Still, the risk is real, they say, and caution is more than justified. By one measure, the amount of investment-grade bonds has doubled to $52 trillion since the financial crisis. And yields have, on average, fallen to roughly 1.8 percent, less than half the level in 2007. If they were to rise by a mere half-percentage point, investors could be looking at almost $2 trillion in losses.

“This is an element of hidden leverage that is not appreciated,” says Jeffrey Snider, global head of research at Alhambra Investments. “We are eventually going to have a shock.”

The current situation is a legacy of the easy-money polices enacted by central banks following the financial crisis. With interest rates at or near zero, governments and corporations went on a historic borrowing binge — and investors gorged on debt that yielded little in return. What’s more, rules to strengthen financial firms and curb their risk-taking meant the big banks now played a much smaller role as intermediaries, transferring more of the risk of getting in and out of trades onto investors.

Using the US Treasury 10-year (yellow) and 3-year Treasury (green) yields, here is a chart of global Treasury modified duration (white).

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Yes, the pounding of global interest rates downwards thanks to Central Bank “easing” has created a potential duration. wipeout.

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And the short-term Central Bank rate hammer is helping to keep global rate depressed, leading to higher duration risk.

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Yes, the Central Banks DID do that!

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Global Supply Of Negative Yield Bonds Hits $10 TRILLION (Europe’s Sweet 16 Of Negative Yielding Sovereign Debt)

To listen to some talking heads, everything is beautiful.

But according to the bond market, everything is not beautiful. In fact, there is concern about global economic growth and financial fragility.

There is now $10 trillion in negative yielding bonds in the global economy.

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And in Europe, there are 16 nations with negatiive 2-year sovereign yields, including Germany and France.

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Notice that the short-end of the yield curves in Europe and Japan are negative.

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People get ready for negative Central Bank rates in the USA!

Fixing The Holes? G-SIB House Hearing For CEOs Of Citi, Wells, BofA, Goldman, MS, JPMC, Etc. But Where Are Fannie Mae And Freddie Mac?

Today’s hearing in the US House of Representatives Financial Services Committee (where the committee calls Globally-Systemically Important Bank (G-SIB) CEOs to testify and ask them uncomfortable questions).

But today’s hearing should have been extended to mortgage giants Fannie Mae and Freddie Mac that unquestionably qualify as Systemically Important Financial Institutions (SIFIs), both under the statutory and FSOC definitions, and in any objective assessment of their financial importance. Are they G-SIBs? Of course.

Fannie Mae and Freddie Mac are supposed to maintain capital. Congress, in enacting the Safety and Soundness Act in 1992, established minimum capital requirements for the Enterprises and those standards have been in place for the past 25+ years. That Act requires the Enterprises to maintain minimum capital that is greater than or equal to:

  • 2.5 percent of on-balance sheet assets, which include mortgage-backed securities (MBS), mortgage loans, and other investments the Enterprises hold in their respective investment portfolios;
  • 0.45 percent of the unpaid principal balance of outstanding MBS not included in on- balance sheet assets, which include MBS the Enterprises issue and guarantee, but do not own and hold in their investment portfolios; and
  • 0.45 percent of “other off-balance sheet obligations.”

Well, the required capital for Fannie Mae and Freddie Mac clearly did not protect their shareholders from a catastrophic failure in 2008 due to declining home prices and a surge in mortgage delinquencies.

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In fairness, Fannie and Freddie are not depository institutions. But the sheer size of their loan portolios is worrisome.

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Whether you want to call Fannie and Freddie SIFIs or G-SIBs, they should have been called to testify as well.

Regulation of G-SIBs

Under the Dodd-Frank Act, all depository institutions with more than $10 billion in assets, including the U.S. G-SIBs, are supervised by the Consumer Financial Protection Bureau for compliance with consumer financial protection laws and regulations. Furthermore, the Dodd-Frank Act subjects the largest banks, including the U.S. G-SIBs, to heightened oversight and enhanced prudential standards to safeguard the U.S. financial system, which are implemented by the Federal Reserve. These requirements include enhanced capital, liquidity and leverage requirements, as well as regular stress testing to ensure banks hold enough capital to survive a future economic downturn or financial crisis. The G-SIBs are also required to submit resolution plans (also referred to as “living wills”) to ensure their firms can be resolved in an orderly way if they were to fail.

There have been several deregulatory developments and proposals in recent years. For example, S.2155, which was signed into law in May 2018 (Public Law 115-174), reduces the frequency of G-SIB stress tests, and it reduces other capital and leverage requirements. In addition, regulators have been advancing their own proposals. In April 2018, the Federal Reserve issued a set of proposals to simplify its capital rules for G-SIBs and introduced a “stress capital buffer,” or SCB, which would in part integrate the forward-looking stress test results with the Board’s non-stress capital requirements. The Federal Reserve joined the OCC in releasing a second proposal to substantially revise the current enhanced supplementary leverage ratio (eSLR) that applies to G-SIBs. After the proposal was released, former FDIC Chairman Martin Gruenberg said, “Strengthening leverage capital requirements for the largest, most systemically important banks in the United States was among the most important post crisis reforms…the amount of tier 1 capital required under the proposed eSLR standard across the lead IDI subsidiaries would be approximately $121 billion less than what is required under the current eSLR standard to be considered well-capitalized” (emphasis added). In response to a request from Committee staff for more information, the FDIC estimated the eSLR proposal would lower capital requirements for the primary federally-insured bank subsidiary of each G-SIB as follows:

● JPMorgan Chase & Co.: $34.597 billion (20.83% reduction in tier 1 capital) ● Citigroup: $26.978 billion (23.3% reduction)
● Bank of America: $22.838 billion (18.5% reduction)
● Wells Fargo: $20.406 billion (16.9% reduction)
● Bank of New York Mellon: $5.911 billion (33.65% reduction)

● State Street: $5.346 billion (37.5% reduction)
● Morgan Stanley: $2.507 billion (25% reduction)
● Goldman Sachs: $1.93 billion (9.49% reduction)

Despite proposing to reduce capital for the G-SIBs, the Federal Reserve’s own research has indicated current capital requirements are on the lower end of requirements that best balances benefits associated with mitigating systemic risk with a bank’s funding costs. Furthermore, the Federal Reserve has also been working on making stress testing more transparent to banks, potentially undermining the value of the regular exercise. Bank regulators have also proposed reducing enhanced prudential standards and liquidity requirements for banks as large as $700 billion, and there have been reports that regulators may reconsider their proposal on the Volcker Rule and propose further rollbacks of Dodd-Frank reforms.

Finally, while the Dodd-Frank Act and related reforms required additional capital and strengthened oversight of G-SIBs through the creation of the Consumer Bureau, there remain concerns regarding whether some of these institutions are adequately being held accountable for repeated consumer violations, and whether these firms may be too big to manage, as was discussed at the Committee’s hearing on March 12, 2019, with Wells Fargo’s former CEO, Tim Sloan.

Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage-finance giants have a combined capital buffer of as much as $180.9 billion should the companies be released from government control.

I would really like to hear what new-minted FHFA Director Mark Calabria has to say on capital requirements and administrative reform.  And turning Fannie and Freddie loose again in the financial system.

Hopefully Calabria will be fixing the holes in the mortgage system.

 

Take It Easy! Fed Risks Stoking Financial Bubble in Drive to Lift Inflation (Here We Go Again!)

Fed Chair Jerome Powell is singing “Take it easy.’

The Federal Reserve risks stoking the same sort of asset bubbles that Chairman Jerome Powell has linked to the last two recessions with its new-found eagerness to fan inflation.

The Fed’s surprise pivot away from any interest rate increases this year has boosted prices of stocks, high yield bonds and other risky assets in spite of nagging investor concerns about slowing global economic growth. Financial conditions, at least as measured by the Chicago Fed, are at their easiest since 1994. And they could well get looser.

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That would put policy makers in a pickle. In unveiling the Fed’s U-turn last month, Powell highlighted the central bank’s determination to promote price pressures by declaring that low inflation was “one of the major challenges of our time.’’ And he left open the possibility that the Fed’s next rate move might be a cut after four increases last year.

But a drive to boost inflation through low interest rates could end up threatening financial stability by encouraging supercharged risk-taking, according to Allianz SE chief economic adviser Mohamed El-Erian.

And it’s just such “destabilizing excesses” that Powell has pinpointed as leading to the last two economic downturns. First it was the dot-com stock market boom of the late 1990s that crash landed and led to the 2001 recession. Then it was the housing boom and bust of the 2000s that preceded the biggest economic contraction since the Great Depression.

Easy Policy

The quandary for the Fed is that easy monetary policy seems more effective in spurring asset values than it does in boosting prices of goods and services.

The S&P 500 Index rose by an average 8.5 percent from 2014 through 2018, while the personal consumption expenditures price index increased 1.3 percent, well below the Fed’s 2 inflation target. In January, the most recent month for which data is available, it stood at just 1.4 percent.

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Well, bank lending YoY for all but Commercial and Industrial (C&I) loan are slowing.

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Mortgage Investors Cool on Swaps as Rush for Duration Ends

Investors in mortgage-backed securities are cooling on swaps used to hedge against falling interest rates, signaling confidence that yields may have found their bottom.

The 10-year swap spread has backed off from the tightest level since October 2017, reached last week. The U.S. Treasury 10-year yield had touched a 15-month low of 2.37 percent on March 27.

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A U.S. homeowner may prepay their mortgage at will, and the duration of a mortgage-backed security can drop dramatically during periods of falling yields due to the potential for faster prepayments. This means MBS investors need to add duration, referred to as “convexity hedging,” as interest rates drop.

A popular method to add duration is by using swaps and “the 10-year is still the most liquid swap for mortgage hedgers,” said Walt Schmidt, head of mortgage strategies at FTN Financial. Now that the 10-year yield has risen again to the 2.50 percent area, swap spreads are back close to where they lay previous to the rally and “the wave of convexity hedging is likely over for now,” he said.

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Duration:  the weighted average maturity of the security’s cash flows, where the present values of the cash flow serve as the weights. The greater the duration of a security, the greater its percentage price volatility.

The Overnight Indexed Swap (OIS) looks like an ARCTANGENT function.

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Slippin’ Jimmy took this photo of Fed Chair Jerome Powell’s chair.

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S&P 500 e-mini Futures On The Rise Again As China Signals Growth (UST 10Y-3M Curve Turns Positive Again!)

China signalled positive manufacturing growth and the market react positvely.
(Bloomberg) — Stocks strengthened worldwide as strong manufacturing data out of the world’s second largest economy (China) helped ease investor worries about a slowdown in global growth. Treasuries extended losses after as a gauge of U.S. factories topped estimates in March.
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The S&P 500, Dow and Nasdaq were all in the green. Shares of Lyft dropped below its IPO price as analysts noted there is limited visibility into the company’s path to growth and profitability. The Stoxx Europe 600 Index climbed on the heels of its best quarter in four years after key China manufacturing PMIs for March beat the highest estimate in Bloomberg surveys of economists. That’s despite manufacturing data for Europe coming in at the lowest since 2013, which briefly caused the euro to pare some of its gains.
E-mini S&P 500 futures are on the rise … again!
 

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And the 10 year – 3 month yield curve turned positive!

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Remain Calm! VIX-MOVE Spread Separates As Fed Rate Cut Predicted

Welcome to the topsy-turvy world of financial markets!

The S&P 500 Cboe Volatility (Equity) index versus the Merrill Lynch 1-month Treasury bill index (MOVE) show a further separation.

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This comes as the WIRP Estimated Number of Moves Priced in for the US (Futures Model) is indicating one rate cut coming up (although Trump’s economist Larry Kudlow wants 50 points in cuts as does Trump’s nominee for The Federal Reserve Board of Governors, Stephen Moore.

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Despite Kudlow and Moore touting 50 basis point cuts (and a slowing advanced retail spending report for February) …

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Remain calm .. all is well!