Best of the Week
Most Popular
1.Stock Market in DANGER of Strangling the Bears to Death - Nadeem_Walayat
2. Germany Pivoting East, Exit US Dollar, Enter Gold Standard - Jim_Willie_CB
3.Flight MH17 – Kiev Flash Mob's Last False Flag? - Andrew_McKillop
4.Stock Market Crash Nightmare! - Nadeem_Walayat
5.Gold - The Million DOLLAR Question... - Rambus_Chartology
6.Gold And Silver – BRICS And Germany Will Pave The Way - Michael_Noonan
7.The Jewish Selfish Gene, People Chosen by God, Everyone Else is Goyim to Kill - Nadeem_Walayat
8.The Israeli Promised Land Dream - The Criminal Roadmap Towards “Greater Israel”? - Felicity Arbuthnot
9.Which Way is Inflation Blowing? Watch Commodities - Gary_Dorsch
10.U.S. Economy Quarterly Review and Implications for 2014-2015 - Lacy Hunt
Last 5 days
Death of the U.S. Dollar? Gold an Inflation Hedge? Really? - 29th July 14
We’re Ready to Profit in the Coming Gold Price Correction—Are You? - 29th July 14
Their Economy Will Collapse, Including Ours - 29th July 14
Silver Prices – Megaphone Patterns - 29th July 14
Real U.S. Interest Rates - Fed Exit a Blue Pill? - 29th July 14
Why Israel Should NOT Exist, Just Like Any Other Rogue State - 29th July 14
Gold Still Looking Good - 29th July 14
Silver Price Set To Star - 29th July 14
Our Population Growth Totalitarian Future - 29th July 14
World War 1 Cause and Consequences - The Planned Destruction of Christendom - 29th July 14
Will Crashing Commodities Crash the Stock Market? - 29th July 14
Ukraine MH17 - Washington Thinks Americans Are Fools - 29th July 14
Stock Market Bubble Warning - 29th July 14
Gold Price and U.S. Dollar’s July Rally - 28th July 14
Second Quarter Corporate Earnings: Marching Toward a Strong Economic Recovery - 28th July 14
Time to Put a New Economic Tool in the Box - 28th July 14
Mossad in Gaza, Ukraine and the Cult Of The All-Powerful Elite - 28th July 14
Elliott Wave Gold Price Projection Since 1970 - 28th July 14
Investors Remain Uncertain As Stock Fluctuate Near Long-Term Highs - Will The Uptrend Extend? - 28th July 14
The Mass Psychology Of Decline - 28th July 14
Will the US Destroy the World? - Don’t Expect to Live Much Longer - 28th July 14
GDM and GDXJ Gold Stocks In-depth Look - 28th July 14
Stock Market One FINAL High? - 28th July 14
What It Means - Paradigm Collapse And Culture Crisis - 27th July 14
Wall Street Shadow Banking: You Can’t Taper a Ponzi Scheme: “Time to Reboot” - 27th July 14
6 Tips for Picking Winning Gold Mining Stocks - 27th July 14
Israel's War on Children, Exterminating the Palestinians Future - 27th July 14
Guilt By Insinuation - How American Propaganda Works - 26th July 14
Surprise Nuclear Attack On Russia To Liberate Ukraine - 26th July 14
Use "Magic" Of Gold/Silver Ratio To Greatly Increase Your Physical Holdings - 26th July 14
Derivatives Market Species Origins - Abuse, Props and Risks - 26th July 14
Stock Market Manipulation and Technical Analysis - 26th July 14
China’s Stock Market Finally Looks Like A Buy - 26th July 14
Ed Milliband Fears Israel Jewish Fundamentalist Gaza War Massacres Backlash - 26th July 14
The Big Energy = Power Battle Is Coming - 25th July 14
USrael - Zionists in Control of America's Goyim Brainwashed Second Coming Slaves - 25th July 14
More Weakness Ahead for Gold Miners - 25th July 14
Gold Price Strong Season Starts - 25th July 14
Geopolitics and Markets Red Flags Raised by the Fed and the BIS on Risk-taking - 25th July 14
Gold Lockdown Until Options Expiry - New Singapore Gold Contract Threatens Price Manipulation - 25th July 14
The Bond Markets, Black Swans, and the Tiny Spirit of Santo - 25th July 14
No Road Map For Avoiding The Future - 25th July 14
Israeli War Machine Concentrating Women and Children into UN Schools Before Killing Them - C4News - 25th July 14
Israeli Government Paying Jewish Fundamentalist Students to Post Facebook Gaza War Propaganda - 25th July 14
Why the Stock Market Is Heading For A Fall - This Time Is Not Different - 25th July 14
An Economic “Nuclear Strike” on Moscow, A “War of Degrees” - 25th July 14
BBC, Western Media Working for Israeli Agenda of Perpetual War to Steal Arab Land - 25th July 14
Ukraine: What To Do When Economic Growth Is Gone - 24th July 14
Stock Market Clear and Present Danger Zone - 24th July 14
The Five Elements to Creating a Something-for-Nothing Society - 24th July 14
Instability is the New Normal? - 24th July 14
Israel's Suicide Bombers Over Gaza - 24th July 14
EUR-AUD Heads Into The Danger Zone - 24th July 14
Tesco Supermarket Death Spiral Accelerates as Customers HATE the Mega Brand - 24th July 14
Ukraine MH17 Crisis - Best Remember Who Your Friends Are - 24th July 14
Three Reasons Why Gold Price and Gold Stocks Will Rise - 24th July 14
HUI Gold Bugs Fighting To Break Downtrend - 23rd July 14
What Putin Knows About Flight MH17 - 23rd July 14
Why Microsoft Will Continue to Rebound, Huge Upside Potential - 23rd July 14
Will Putin Survive? - 23rd July 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