Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
Gold GLD ETF Update… Breakdown ? - 20th Jun 18
Short-term Turnaround in Bitcoin Might Not Be What You Think - 19th Jun 18
Stock Market’s Short Term Downside Will be Limited - 19th Jun 18
Natural Gas Setup for 32% Move in UGAZ Fund - 19th Jun 18
Magnus Collective To Empower Automation And Artificial Intelligence - 19th Jun 18
Trump A Bull in a China Shop - 19th Jun 18
Minor Car Accident! What Happens After You Report Your Accident to Your Insurer - 19th Jun 18
US Majors Flush Out A Major Pivot Low and What’s Next - 18th Jun 18
Cocoa Commodities Trading Analysis - 18th Jun 18
Stock Market Consolidating in an Uptrend - 18th Jun 18
Russell Has Gone Up 7 Weeks in a Row. EXTREMELY Bullish for Stocks - 18th Jun 18
What Happens Next to Stocks when Tech Massively Outperforms Utilities and Consumer Staples - 18th Jun 18
The Trillion Dollar Market You’ve Never Heard Of - 18th Jun 18
The Corruption of Capitalism - 17th Jun 18
North Korea, Trade Wars, Precious Metals and Bitcoin - 17th Jun 18
Climate Change and Fish Stocks – Burning Oxygen! - 17th Jun 18
A $1,180 Ticket to NEW Trading Opportunities, FREE! - 16th Jun 18
Gold Bullish on Fed Interest Rate Hike - 16th Jun 18
Respite for Bitcoin Traders Might Be Deceptive - 16th Jun 18
The Euro Crashed Yesterday. Bearish for Euro and Bullish for USD - 15th Jun 18
Inflation Trade, in Progress Since Gold Kicked it Off - 15th Jun 18
Can Saudi Arabia Prevent The Next Oil Shock? - 15th Jun 18
The Biggest Online Gambling Companies - 15th Jun 18
Powell's Excess Reserve Change and Gold - 15th Jun 18
Is This a Big Sign of a Big Stock Market Turn? - 15th Jun 18
Will Italy Sink the EU and Boost Gold? - 15th Jun 18
Bumper Crash! Land Rover Discovery Sport vs Audi - 15th Jun 18
Stock Market Topping Pattern or Just Pause Before Going Higher? - 14th Jun 18
Is the ECB Ending QE a Good Thing? Markets Think So - 14th Jun 18
Yield Curve Continues to Flatten. A Bullish Sign for the Stock Market - 14th Jun 18
How Online Gambling has Impacted the Economy - 14th Jun 18
Crude Oil Price Targeting $58 ppb Before Finding Support - 14th Jun 18
Stock Market Near Another Top? - 14th Jun 18
Thorpe Park REAL Walking Dead Living Nightmare Zombie Car Park Ride Experience! - 14th Jun 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

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

© 2005-2018 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

6 Critical Money Making Rules