Treasury Yield Curves Inverts Even More As Treasury Volatility Spikes (Leveraged VIX Volume Highest In History)

The US Treasury yield curved inverted on Friday for the first time since 2007 and it became ever more inverted today as 10-year T-Note Volatility spiked.

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Investors are taking large bets on the leveraged VIX note with inflows the highest in recorded history (that is, since 2011).

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Former Fed Chair Janet Yellen said not to worry. Inversion may simply be a rate cut signal, not recession. So don’t think twice, it’s alright.

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Fed’s Powell Turns Dove And Throws In The Towel As Yield/OIS Curves Remain Kinked

With a projected slowing economy and core inflation still under 2%, Fed Chair Jerome Powell officially threw in the towel on monetary normalization yesterday by announcing  no more rate increases this year and balance sheet reduction will cease in September.

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The US Treasury Actives curve remains kinked from 6 months to 10 years reflecting economic slowdown. The overnight indexed swap curve is hyper-kinked.

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A closer look at the US  Overnight Indexed Swap rate flattened after The Fed’s last rate hike, signaling that there be no more in the short run.

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One can view Powell as Mean Mr. Mustard (and Yellen as Polythene Pam), the surrender on monetary normalization is welcome by equity markets and mortgage lenders.

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An Occurrence At The Federal Reserve: Increased SMART Money & Equity Volatility, Crushed Bond Volatility

Ambrose Bierce wrote a short story about a man being hanged during the American Civil War and what went through his mind in his final moments. It is called “An Occurrence At Owl Creek Bridge.” Hauntingly similar to today’s plight: overoptimistic expectations before being hung, then …. snap.

In summary., Ben Bernanke and The Federal Reserve entered the markets in 2008 in force. The Fed Funds Target rate was raised once during President Obama’s two terms as President, but eight times since President Trump’s election as President. Plus, The Fed’s Quantitative Tightening (in terms of its balance sheet) begin in earnest in 2019.

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Once The Fed hurled its monetary weight at the economy in 2008, the stock market had an amazing run. but since The Fed started to raise rates and began their balance sheet unwind, the S&P 500 index has increased in volatility as has the SMART Money Flow Index.

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The bond market volatility indices have gotten crushed by central banks.

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On the real estate front, equity REITs, like the small cap Russell equity indices, seemed to be benefit greatly from The Fed’s Zero Interest Rate Policy and QE. Mortgage REITs, on the other hand, kind of died with the financial crisis and never recovered. The RCA CPPI commercial real estate index too off like a missile.

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Like in the Ambrose Bierce short story “An Occurrence At Owl Creek Bridge,” The Fed and other central banks are quitting any attempts at rate normalization (for fear that they might hear that dreaded “snap” at the end of the monetary rope].

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Did The Federal Reserve Kill Off 10-Year Swaption Volatility? (Lowest Since 2005)

10-year Swaption volatility has sunk to the lowest level since 2005. Did The Federal Reserve provide too much liquidity for too long, effectively drowning bond volatility?

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The Fed’s lingering Target Rate near zero and its three rounds of asset purchases helped kill of bond volatiilty. And with rising Fed Target rate and balance sheet unwind (removing liquidity from markets) has pushed bond volatility to 2006-2007 levels.

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So, the answer is … YES!

(Vol has been) shot through the heart and The Fed’s to blame! The Fed gives central banks a.bad name.

MOVE 3-month Option Volatility Index Hits All-time Low (Bond Market Bernanke’d!)

The  Merrill Lynch Option Volatility Estimate 3-Month has just hit an all-time low.

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The MOVE index is a yield curve weighted index of the normalized implied  volatility on 3-month Treasury options. It is the weighted average of volatilities on the CT2, CT5,  CT10, and CT30.

Even since Fed Chair Ben Bernanke started ZIRP and QE in 2008, continued by Janet Yellen, interest rate volatility has subsided to an all-time low under current Chairman Powell.

Not a great time for volatility traders!

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Alarm! Europe’s And US Bond Volatility Grinding To A Halt (Precursor To Recession)

European bond volatility (according to the Merrill Lynch 3-month EUR option volatility estimate) has plunged to the lowest level on record.

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A similar chart for the US bond market is the Merrill Lynch Option Volatility Estimate for 3-months shows exactly the same thing. The US bond market is grinding to a halt.

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Note that the US MOVE 3-month estimate hit a low in May 2007, just ahead of The Great Recession of 2007-2009.

Alarm!

 

Retail Inferno! Gap, JCPenney, Victoria’s Secret, Foot Locker, 465 Store Closures in 48 Hours (Examples Of Columbus OH-Based Washington Prime REIT And Limited Brands)

The retail inferno continues!

Last week, the US experienced a large crash in retail spending in December in the form of MoM Real Personal Consumption Expenditures.

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Then we have this gut-wrenching report on retail stores.

The ‘retail apocalypse’ is alive and well this week with major chains such as Gap, JCPenney, Victoria’s Secret and Foot Locker all announcing massive closures, totaling the death of more than 465 stores over the last 48 hours.

In the last 48 hours alone, several shopping-center staples unveiled plans to trim their footprints across the U.S. Gap Inc. said it would slash the store count of its struggling namesake brand by 230 locations over the next two years, just hours after J.C. Penney Co. confirmed it would shutter18 department stores. That news came on the heels of L Brands Inc.’s decision to close 53 Victoria’s Secrets in North America this year. And it’s not just apparel: Tesla Inc., whose galleries are often inside shopping centers, just said it’s moving all its sales online.

These moves come on top of all of the chains that have already announced they’re closing down or reducing their footprints due to bankruptcy. This includes Payless Inc., which is abandoning 2,500 stores, Things Remembered, which is closing most of its 400 stores and selling the rest, while mall favorite Brookstone Inc. slims down operations and Sears continues to shutter locations. Taken as a whole, many of today’s shopping centers are becoming little more than an assemblage of fast-fashion retailers, Apple stores and food courts.

As an example of how retail Real Estate Investment Trusts (REITs) have been hurt by changing consumer shopping habits, take Washington Prime REIT (formerly Glimcher REIT) from Columbus Ohio. With Amazon’s rise since 2014, Washington Prime has dived from over $20 per share to its current share price of $5.14.

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Also, Columbus, Ohio-based Limited Brands (aka, L Brands) was trading at over $100 per share in 2015, but is now trading at $27.50. The Limited empire once included The Limited, Limited Too, Limited Express,. Galyans, Henri Bendel, Abercrombie and Fitch, Lane Bryant., Lerner, Victoria’s Secret, Bath and Body Works and Pink. Only the last three still have a mall footprint with The Limited going solely on-line. How the mighty have fallen.

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Of course, empty space can be repurposed with gyms (Planet Fitness), churches, physician’s offices, more bad chain restaurants and … day care facilities.

But it isn’t just retail. Check out the crashing price per square foot of suburban office space for Northern Virginia where office conversions are all the rage.

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And Northern Virginia office vacancies are launching into outer space.

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Global Yield Curve Inversion (Same All Over The World)

An interesting chart of the 30-year sovereign yields less Fed Funds rate reveals that much of the world is in a state of global yield curve inversion. (Graph courtesy of the great folks at Crescat Capital).

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While the US is not in a state of yield curve inversion (except for the 1-5 segment), the US remains (for the moment) is positive territory.

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I prefer using the 10-year Treasury Note for curve analysis rather than the 30-year Treasury Bond.

One might observe that Treasury volatility measures are quite low … again.

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So, yield curve inversion is the same all over the world. The US seems to be on track to invert as well.