Here we go again. The 10-year – 3-month Treasury curve has turned negative again.
Here we go again. The 10-year – 3-month Treasury curve has turned negative again.
Despite repeated warnings about out of control entitlement liabilities, Congress keeps spending money they don’t have. Instead, they run massive deficits and their demand for Treasury borrowing is out of control (unless you believe in fairy tales like Modern Monetary “Theory” where you run staggering deficits and print money until you drop … or default on your debt).
So, Treasury demand for debt growing and foreign interest in US debt is shrinking. In fact, China and Japan’s Treasury holdings are falling faster than the Treasury is unwinding.
(Bloomberg) — The U.S. Treasury on Wednesday saw the weakest demand for its benchmark 10-year note in a decade, illustrating the diminishing appetite among some investors to accept current yields.
Bids for the $27 billion of notes exceeded the offering by 2.17 times, the lowest since 2009. While there’s no danger that the government of the world’s biggest economy would fail to fund itself, the drop underscores a shift in demand dynamics for Treasuries that could leave them vulnerable to spikes in volatility.
Foreign investors, led by China and Japan, have accounted for a smaller and smaller share of American government debt outstanding. And the Federal Reserve, for now, continues to trim its holdings. That’s put the onus on domestic U.S. investors, at a time when 10-year yields are little more than three-month ones.
As The Fed continues its unwind of its balance sheet, the 10-year T-Note yield continues to decline while gold has generally risen.
Why are investors optimistic that China will cooperate on trade? While seemingly in their best interest, the “sleeping dragon” has morphed into the “stubborn dragon.”
Volatility markets are signaling elevated risks for equities, flashing a warning sign that portended some of the major market meltdowns in recent memory.
The front-month VIX futures curve traded above the second-month future shortly after 10 a.m. New York Time as the retreat in the S&P 500 Index intensified. The inversion was spurred by a second wave of selling following comments from U.S. Trade Representative Robert Lighthizer late Monday, when he affirmed that President Donald Trump’s vow that the U.S. would hike tariffs on China wasn’t empty. Those comments delivered a blow to traders who hoped the president’s weekend tweets were mere posturing.
Typically, the VIX futures curve is upward-sloping (in so-called contango) because the outlook for U.S. equities is more uncertain over the long run than the short run. When the curve is downward-sloping (in backwardation), it shows investors are acutely concerned with the near-term risks to U.S. equities.
It also inverted in the fourth quarter days after Federal Reserve Chair Jerome Powell indicated that rates were a “long way” from neutral, remarks which helped accelerate the drubbing in U.S. equities that sent the S&P 500 Index to the edge of a bear market.
China and The Federal Reserve? Two belligerent super powers!
US home buyers are benefitting from European economic misery (particularly Germany and fiscal-stressed Italy). I call this the Blitzkrieg Bop.
On the other side of the interest rate barbell is China (and Japan). So while the USA is growing, Germany and Japan are not doing so well, causing their Central Banks to push rates to zero .,.. or lower. Even China’s Central Bank is buying everything in sight in fear of a recession.
Hence, US mortgage lenders and potential homebuyers benefit is terms of dropping interest rates.
You can see the downward plunge in the Treasury Volatility Curve (MOVE – TYVIX) as Central Banks become active in 2008 and 2009. The 30-year mortgage rate has been declining thanks to hyper-intrusion of global central banks, killing off bond volatility.
Allegedly, The Federal Reserve is ceasing its raising of their target rate and will stop shrinking their balance sheet in September.
Mortgage purchase applications (NSA) are in their third phase and doing quite nicely, helped along recently by the barbell slowdowns overseas.
(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).
Yes, the pounding of global interest rates downwards thanks to Central Bank “easing” has created a potential duration. wipeout.
And the short-term Central Bank rate hammer is helping to keep global rate depressed, leading to higher duration risk.
Yes, the Central Banks DID do that!
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.
And in Europe, there are 16 nations with negatiive 2-year sovereign yields, including Germany and France.
Notice that the short-end of the yield curves in Europe and Japan are negative.
People get ready for negative Central Bank rates in the USA!
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.
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.
|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.
Slippin’ Jimmy took this photo of Fed Chair Jerome Powell’s chair.
And the 10 year – 3 month yield curve turned positive!
The US Treasury actives curve and dollar swaps curves are markedly sagged (or kinked).
But other countries are experiencing curve sags as well, but just not as pronounced. Germany, Japan, UK and France are all sagging, but less notably.
Numerous risks abound in the global economy such as Brexit, China trade disagreement, etc.
On the other hand, there is Venezuela which has entered a seemingly permanent sag.
And the SAG award goes to … the USA for short-term SAG.
The permanent SAG award goes to …. Nicolas Maduro and Venezuela.
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.
Investors are taking large bets on the leveraged VIX note with inflows the highest in recorded history (that is, since 2011).