Fed Will Purchase $4.65 Billion 3-7 Year Treasury Coupons Next Week (These Rates Were Made For Dropping)

These rates were made for dropping.

(Bloomberg Intelligence) — The New York Federal Reserve will purchase T-bills twice next week. Besides bills, it will buy the 3-4.5 year and 4.5-7 year coupons using MBS runoff proceeds. In this note, we look at the bonds the Fed is unlikely to purchase, given its self-imposed buying criteria; for T-bills, the Fed avoids those with four weeks or less to maturity. 

The Fed has several criteria for adding bonds to its portfolio. The trading desk will limit System Open Market Account (SOMA) holdings to a maximum of 70% of the total outstanding amount of any security. It also won’t purchase securities trading special in the repo market for specific collateral, newly issued nominal-coupon securities and those that are cheapest to deliver into an active Treasury futures contract. Exclusions also include securities that mature in four weeks or less.

The exhibit shows bonds the Fed likely won’t purchase, based on these conditions.

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Here is a snapshot of the 3-7-year sector of Treasury coupons outstanding and their spread relative to a theoretical relative-value spline curve. The Fed will look to purchase securities that are cheap to its own relative-value model.

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The US Treasury curve slope (10Y-3M) has creeped into positive territory.

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And mortgage rates continue to rise again.

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Yes, these rates were made for droppin’. And that’s just what they’ll do.

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Natural Born (Volatility) Killers! ECB’s Draghi’s Low Volatility Legacy (Fed Also Kills Bond Volatility AND Term Premium)

The ECB under Draghi has been effective a depressing bond volatility and yields as he passes the torch to Christine Lagarde.

(Bloomberg) — Looking through the lens of rates market volatility, Mario Draghi has performed a masterclass in the art of keeping it very low. Incoming European Central Bank President Christine Lagarde will have a challenge to achieve the same effect as monetary policy nears its limits.

A successful central bank will aim to keep market volatility controlled by the predictability of its policy. Draghi has been in the business of keeping euro rates volatility suppressed, by communicating policy shifts effectively and deploying large-scale monetary easing.

Lagarde may find it harder to achieve a consensus on easing, inheriting a divided Governing Council. Policy makers disagree on whether more monetary stimulus is needed, and have voiced louder calls for fiscal policy to do more.

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Of course, The Federal Reserve is not too shabby about killing bond volatility.

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Treasury note term premium (the amount by which the yield-to-maturity of a long-term bond exceeds that of a short-term bond) has been reduced to negative territory.

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Yes, the ECB and Fed are natural born volatility killers.

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October Country: US Treasury Yield Curve 10Y-3M Not Yet There Yet In Predicting Recession

Welcome to The October Country! Where historically we have seen stock market corrections/crashes. But this time it is different with a global economic slowdown AND Presidential impeachment inquires, etc.

But the US Treasury yield curve is not quite there yet in signaling a recession. Prior to the 2001 recession,  the UST 10Y-3M curve slope hit -78.75 bps in December 2000. And the 10Y-3M slope hit -62.24 bps in February 2007. Thus far, the 10Y-3M slope has only declined to -51.4 bps on August 27, 2019. And has retreated to -20 bps.

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The depth and breadth of the 10Y-3M slope isn’t as bad as prior to the 2001 and 2008-2009 recessions. But two recessions is hardly a compelling sample.

Here are the Treasury and Dollar Swap curves on March 6, 2007 …

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And today.

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Let’s see if The Fed tries to ward off recession or “The October Country.”

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Treasury, Swap And SOFR Curves Remain Inverted Compared To 1 Year Ago (Venezuela’s 6M Yield At 17,500%)

Foul Powell on the prowl? 

The US Treasury actives curve certainly is different than one year ago. It was upward sloping, but not it is downward sloping to 5 years then upward sloping again.

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The US dollar swaps curve was steeply upward sloping a year ago, but now is deeply downward sloping up to 18 months.

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At least the great rum-producing nation of Venezuela looks pretty much the same as 1 year ago, with the exception of the short end where the 6 month sovereign yield is … 17,500%.

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The Crazy World Of Jerome Powell: Fed’s FOMC Lowers Target Rate By 25 BPS As Repo, SOFR Rates Balloon, Dow Drops Over 150 Pts

The Fed is the God of Hellfire!

The FOMC lower the Fed’s target rate by 25 basis points to 2.00%.

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The NY Fed’s SOFR rate ballooned to 5.25%.

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The GCF Repo Index ballooned to 6%.

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The US Treasury and Dollar Swaps curves remain … kinky.

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On the news, the Dow tanked over 160 points. Is the market signaling too little for the rate cut?

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The Crazy World of … Jerome Powell.

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Fed Fresh! Fed Reverses Course And Increases Treasury Holdings For First Time Since QE3 (Curve Remains Inverted To 5 Years)

Yes, The Federal Reserve has reversed its Treasury note and bond wind-down by increasing the size of its holdings for the first time since QE3.

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The US Treasury curve remains inverted out to 5 years.

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This is somewhat fresh, so I will call it “Fed Fresh.”

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Just spray some on to lower the 10-year Treasury yield!

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US Trade Weighted Broad Dollar Index Hits All-time High!

The US Trade Weighted Broad Dollar Index just hit an all-time high!

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Meanwhile, President Trump keeps needling Powell and The Fed to lower interest rates, but Trump can’t seem to make Powell his.

Meanwhile. Powell’s Jackson Hole speech is helping to push down the 2-year Treasury yield.

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The 10Y-3M Treasury curve slope fell to -43 basis point on the China/Fed (Ched?) fistfight.

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And the Treasury/Swap curves remain … Ched’d?

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Meanwhile, Powell and Fed Fans are in Jackson Hole Wyoming doing “Talk, talk.”

Beyond The Sea! Boston Fed’s Rosengren’s Plea To Not Cut Rates While Europe Slows (17 European Nations Have Negative 2Y Yields, 13 European Nations Have Negative 10Y Yields)

What a difference 10+ years make in financial markets.

Here is the US Treasury yield curve at the height of the housing bubble (2005) compared to today. Back on July 1, 2005, the yield curve was upward sloping whereas today the curve is inverted at tenors of 5 years or less, then upward sloping.

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At the ten year maturity, both Canada and the US are below 2% in terms of yield (Venezuela is at a whopping 55%!). Chile, in USD, is just about 2%.

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Beyond the sea (Atlantic), there are 13 nations will negative 10-year sovereign yields. Plus the European Financial Stability Facility is at -0.357%.

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At the two-year maturity, Europe has 17 nations with negative yields. And tanking.

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The Boston Fed’s Rosengren is arguing against further rate cuts from an effective Fed Funds rate of 2.1250% while the European Central Bank (ECB) target rate is … -0.40%. That is quite a spread!

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(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren continued to push back against further interest-rate cuts by the central bank, arguing he’s not convinced that slowing trade and global growth will significantly dent the U.S. economy.

Meantime, President Donald Trump urged the Fed to cut by a full percentage point to aid U.S. and global growth while complaining the “dollar is so strong that it is sadly hurting other parts of the world”

The German government is getting ready to act to shore up Europe’s largest economy, preparing fiscal stimulus measures that could be triggered by a deep recession, according to two people with direct knowledge of the matter.

Rosengren’s point is that the US economy is still growing with low unemployment while Europe is grinding to a halt. Germany is at 0.40% YoY, Italy is at 0% YoY and France is at 1.30%. The US is at 2.3% YoY. This is, in part, Rosengren’s point.

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While the US economy is humming along at 2.3% YoY growth, Treasury is considering issuing 50- and 100-year bonds. Both will have huge duration and convexity risk.

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So, economic slowdowns beyond the (Atlantic) sea may spill over to the US.

President Trump needs a Dream Lover to enact his rate cuts. Otherwise, markets will be splishy-splashy.

 

 

Come Dancing? US Treasury Considering Issuing 50- or 100-year Bonds As 30-Year Treasury Bond Yield Hits All-time Low (Negative Yielding Debt Growth Sends Gold Skyrocketing – 14 European Countries Have Negative 10-year Yields)

As the US House of Representatives (that controls the purse strings of the Federal government) escalates spending, the US Treasury has to issue more debt. In fact, the US has now exceeded the 100% debt to GDP that was first exceeded back in 2012 in the wake of the financial crisis.

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And with the US Treasury 30-year yield hitting all-time lows,

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Treasury is exploring longer-term maturities to refinance its debt and issue additional debt to cover the Federal budget deficit.

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(Bloomberg) — With interest rates on 30-year U.S. debt hitting all-time lows this week, the US government is once again considering whether to start borrowing for even longer.

The U.S. Treasury Department said Friday that it wants to know what investors think about the government potentially issuing 50-year or 100-year bonds, going way beyond the current three-decade maximum.

Well, US dollar swaps go out to 50 years, so 50-year Treasuries are not that much of a leap.  But can we try 40 years first??

But given the unusual shape of the Treasury and Swap curves (both inverted in the short-term), is this Fed-caused disturbance in the yield curve or a signal of recession in the coming 5 years.

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And as global negative yielding debt explodes, so does gold prices.

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Its the same all over the world in terms of negative yields.

In fact, 14 European nations have negative 10-year yields.

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How Low Can They Go? Denmark’s Jyske Bank Introduces Ten-year, Fixed-rate Loan At -0.5% (Entire Danish Sovereign Curve Is Negative)

Denmark’s Jyske Bank has introduced a 10-year, fixed-rate loan at … -0.5%. As have other Danish lenders Realkredit Danmark, Totalkredit and Nordea Kredit.

Of course, the entire Danish sovereign yield curve is negative and their 10-year sovereign rate is -0.53%., essentially the same as the Jyske Bank 10-year loan rate.

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While this seems insane, Jyske Bank has only lost 50% since 2007 compared with Deutsche Bank that has lost considerably more since 2007.

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Not to mention that the Danish Central Bank has a bank rate of … -0.7%.

How low can they go?

An example of Danish housing imitating North Sea icebergs waiting for the next Titanic.

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