Best of the Week
Most Popular
1.U.S. Housing Bull Market Over? House Prices Trend Forecast Current State - Nadeem_Walayat
2.The Coming U.S. Economic Collapse Will Trigger a Revolution - Harry_Dent
3. Stock Market Crash a Historical Pattern? - Wim_Grommen
4.Global Panic - U.S. Federal Government Stockpiling Ammo – Here’s What We’re Going to Do - Shah Gilani
5.AI, Robotics, and the Future of Jobs - Aaron Smith
6.This is Your Economic Recovery With and Without Drugs - James_Quinn
7.Gold and Silver Price Getting Set To Explode Higher - Austin_Galt
8.The Something for Nothing Society - Lifecycle of Bureaucracy - Ty_Andros
9.Another Interesting Stock Market Juncture - Tony_Caldaro
10.Inflation vs the Deflationary Straw Man - Gary_Tanashian
Last 5 days
Independent Scotland Currency, Plan A, B, C or D - British or Scottish Pound? - 2nd Sep 14
Gold and Silver Price A Critical Juncture - 2nd Sep 14
Gold and Silver Precious Metals Complex Contradiction and Potential - 2nd Sep 14
France And The Long-Gone Thatcher Moment - 2nd Sep 14
Stock Market Approaching An Important High? - 2nd Sep 14
Gold, Silver Price Summer Doldrums Coming to an End - 2nd Sep 14
The Ultimate Demise Of The Euro Union - 1st Sep 14
Palladium Price Breaks Multi-Year High Over $900 - 1st Sep 14
When Complexity Becomes Chaos - 1st Sep 14
Designer War By Default - 1st Sep 14
Islamic State or Russia? Ten Key Questions Towards Pragmatism - 1st Sep 14
Mixed Emotions for the Gold Market - 1st Sep 14
These Clowns Are Dragging Us Into War with Russia - 1st Sep 14
Marx And The Capitalist Cancer Of Overproduction - 1st Sep 14
Scottish Banks Salivating at the Prospects for an Independent Scotland of 6 Million Debt Slaves - 1st Sep 14
Small Man Europe Is Now In “Effective State Of War” With Russia - 31st Aug 14
The Unintended Blowback Of False Flags - 31st Aug 14
Tesco Supermarket Death Spiral Latest Profits Warning and Dividend Slashed - 31st Aug 14
Dow, Gold and Silver - A Last Stand, A Fake Out And A Surge - 31st Aug 14
If U.S. Consumers are so Confident Why aren't They Spending? - 31st Aug 14
Scotland Independence House Prices Crash, Deflationary Debt Death Spiral - 31st Aug 14
Obama’s “Catastrophic Defeat” in Ukraine - 30th Aug 14
Stock Market Inflection Point Approaching - 30th Aug 14
Gold And Silver - Elite's NWO Losing Traction. Expect More War - 30th Aug 14
Corporations Join Droves of Americans Renouncing US Citizenship - 30th Aug 14
Peter Schiff U.S. Housing Market, House Prices Bubble Warning - 30th Aug 14
Russia, Ukraine War - It’s Time to Play the “Gazprom Card” - 29th Aug 14
The One Tech Stock Investment You Should Never Sell - 29th Aug 14
Bitcoin Price $500 as Current Downside Barrier - 29th Aug 14
Don't Get Ruined by These 10 Popular Stock Market Investment Myths - 29th Aug 14
Low Cost Transcontinental Gold - 29th Aug 14
Gold Bullish Central Banks Should Give Money Directly To The People - Helicopter Janet? - 29th Aug 14
US House Prices Bull Market Over? Trend Forecast Video - 29th Aug 14
The Fed Meeting at Jackson Hole Exposed Yellen’s Greatest Weakness - 29th Aug 14
AAPL Apple Stock About To Get sMACked - 29th Aug 14
A History of Unlimited Money: Learn From It or Repeat Its Mistakes - 29th Aug 14
How You Can Play to Win When Market Makers Are Calling the Shots - 28th Aug 14
EU Gas Supply Is In Real And Imminent Danger - 28th Aug 14
Central Banks at the Root of Evil - 28th Aug 14
European Bond Market: Bubble of all Bubbles! - 28th Aug 14
Employers Aren’t Just Whining: The “Skills Gap” Is Real - 28th Aug 14
The ISIS Menace - Just What We Need, Another War - 27th Aug 14
The Risky Business of Methane-Rich “Fire Ice” - 27th Aug 14
CFR Recommends Policy Shift that is Very Bullish for Gold - 27th Aug 14
Ukraine Standoff Signals Global Power Shift - 27th Aug 14
Stock Market Panic Decline Begins - 27th Aug 14
The Monopoly of the Government Education Cartel - 27th Aug 14
How to Invest in Silver Today for Double-Digit Gains - 27th Aug 14
The Big Solar Energy Breakthrough We've Been Waiting For - 27th Aug 14
U.S. Empire’s Bumpy Ride - 27th Aug 14
Gold Market and the Interest Rate Trap - 27th Aug 14
Stock Market Staring Into the Great Abyss - 27th Aug 14
A Look at the Coming 30-year Inflation Cycle - 27th Aug 14
Forex Trading - Will USD/CHF Rally Above 0.9200? - 27th Aug 14
Europe’s Depressing Economy Dog Days of Summer - 27th Aug 14
How The Coming Silver Price Bubble Will Develop - 26th Aug 14
A Nation of Shopkeepers - Supply-Side (Voodoo) Economics? - 26th Aug 14
Stock Market Bear Tracks Abound In Wall Street - 26th Aug 14
65,000 U.S. Marines Hold up a Mirror to the Economy - 26th Aug 14
Bitcoin Market Provides Clues for Investors - 26th Aug 14
The Key to Trading Success - 26th Aug 14
Will The US Succeed in Breaking Russia to Maintain Dollar Hegemony?... - 26th Aug 14
Even Mainstream Academia Worried about Massive Bubbles in Markets - 26th Aug 14
Iraq and Syria Follow Lebanon's Precedent - 26th Aug 14
Colonization by Bankruptcy: The High-stakes Chess Match for Argentina - 26th Aug 14
Dow Stock Index On The Cusp - 26th Aug 14
Prohibition Laws and Agency Regulations - 26th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

U.S. Treasury Bond market Severely Damaged

Interest-Rates / US Bonds May 25, 2009 - 07:50 AM GMT

By: Levente_Mady

Interest-Rates

The bond market was severely damaged last week.  The theme from my previous note about the continued deterioration of the credit quality of government bonds and the consequent increase in real yields is certainly coming to fruition in swift fashion.  It all started on Wednesday when the Standard and Poor’s rating agency issued a credit watch (with negative implications – i.e. potential downgrade from the best available AAA rating) for bonds issued by the United Kingdom – also known as Gilts. 


Ironically, after a brief negative reaction the British currency started to turn around and strengthen along with most other currencies at the expense of the US Dollar and US Treasury bonds.  The word was out that a similar credit watch was imminent for US Treasury securities.  The rout was on for the rest of the week.  Add to this further supply concerns – the Treasury will auction in excess of $100B 2-5-7 year notes next week – and the situation looks quite bleak. 

As Uncle Bob (of the Hoye variety) mentioned in his notes this week, the REAL yield on Treasury bonds has gone from -1.5% to +5% and counting.  Bob is looking for real rates to head into double digits and I don’t disagree with him.  What he did not discuss in his last note is the devastating effect this will have on economic activity going forward.  For decades at the first sign of distress the Fed would come in and lower rates and force real rates to 0 or below.  That worked until nominal rates got to 0 (which is where we are now) and inflation stayed above 0 (i.e. deflation was avoided).  It is rising real rates that kill!  Let’s look at a brief real life example. 

If you bought a house and you are paying 10% interest (suppose it is one of those special deals where you put 0 down and don’t have to make any payments for the first 5 years), as long as the value of your house is rising by more than 10% - say 20%, you are making out like a bandit.  Your cost of funds (10%) is below your rate of inflation (20%), leaving your real interest rate at -10%.  On the other hand even if your interest rate is at 0% but the price of your house is declining (say at 10%) all of the sudden the real interest is at +10% and your mortgage is upside down – you owe more than what the house is worth.  Lights out, business closed.  If real rates are indeed heading into double digits, the snappy recovery that consensus is looking for will not materialize later this year, nor next year and possibly not even 5 years from now.

Meanwhile the financial sector continues to see signs of severe stress.  The steady stream of financial institutions (mostly banks and credit unions thus far) imploding was evident again last week.  A couple of banks in Illinois and BankUnited (the largest independent bank in Florida) were shut down and taken over by the regulators.  The count is at 36 and it does not appear to be abating.  If anything, it is getting worse as BankUnited is by far the largest institution taken down thus far. 

NOTEWORTHY:  The economic calendar was very quiet last week.  The few data points – mostly disappointing and therefore supportive for the market – were quickly discounted as the focus of the week was credit quality.  The week started off with a record low Housing Starts report.  In the 50 year history of this data series the 458k was the lowest number ever.  The data not only plunged 12.8% from March but it was also close to 20% below consensus forecast! So much for green shoots on the Housing Starts data.  Weekly Initial Jobless Claims remained elevated as they declined 6k lower to 631k, while Continued Benefits were up another 75k+ to 6.66 Million.  The Philadelphia Fed’s Manufacturing Survey was little changed at -22.4, forecasting further weakness in the manufacturing sector.  Leading Economic Indicators were positive for the first time in 10 months increasing 1.0% with help from a rising stock market and improving consumer sentiment.  In Canada, CPI inflation declined 0.3% to bring the annual figure to 0.4% and falling.  This week’s schedule will include data on home sales, Durable Goods Orders, consumer sentiment and the second cut at the Q1 GDP report.

INFLUENCES:  Trader sentiment surveys were stable this week.  While longer term this metric is supportive, in the short term it has more room to move before it becomes overdone.  The Commitment of Traders reports showed that Commercial traders were net long 434k 10 year Treasury Note futures equivalents – an increase of 57k from last week.  This is supportive.  It is also telling us that the smart money continues to accumulate long positions as yields rise.  Seasonal influences are positive.  The technical picture is still less than constructive as the market broke again for new lows for 2009.  As per last week’s comments, I am looking for yields to top out around the 3.5% on the 10 Year Treasury Note Yield (at 3.45% as of Friday).

RATES:  The US Long Bond future collapsed over three and a half points to 119-10, while the yield on the US 10-year note increased 32 basis points to 3.45% during the past week.  The Canadian 10 year yield was 16 basis points higher at 3.25%.  The US yield curve was sharply steeper as the difference between the 2 year and 10 year Treasury yield increased 29 basis points to 257. 

BOTTOM LINE:  Bond yields jumped sharply, while the yield curve was significantly steeper last week.  The fundamental backdrop remains weak, which is supportive for bonds.  Trader sentiment was stable in bearish territory – which is positive; Commitment of Traders positions are supportive and seasonal influences are becoming positive.  My bond market view is positive.

By Levente Mady
lmady@mfglobal.com
www.mfglobal.ca

The data and comments provided above are for information purposes only and must not be construed as an indication or guarantee of any kind of what the future performance of the concerned markets will be. While the information in this publication cannot be guaranteed, it was obtained from sources believed to be reliable.  Futures and Forex trading involves a substantial risk of loss and is not suitable for all investors.  Please carefully consider your financial condition prior to making any investments.

MF Global Canada Co. is a member of the Canadian Investor Protection Fund.

© 2009 Levente Mady, All Rights Reserved

Levente Mady Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014