Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Technical Analyst: Gold Price Weakness Should Be Short Term - 24th May 19
Silver Price Looking Weaker than Gold - 24th May 19
Nigel Farage's Brexit Party EU Elections Seats Results Forecast - 24th May 19
Powerful Signal from Gold GDX - 24th May 19
Eye Opening Currency Charts – Why Precious Metals Are Falling - 23rd May 19
Netflix Has 175 Days Left to Pull Off a Miracle… or It’s All Over - 23rd May 19
Capitalism Works, Ravenous Capitalism Doesn’t - 23rd May 19
The Euro Is Bidding Its Time: A Reversal at Hand? - 23rd May 19
Gold Demand Rose 7% in Q1 2019. A Launching Pad Higher for Gold? - 23rd May 19
Global Economic Tensions Translate Into Oil Price Volatility - 22nd May 19
The Coming Pension Crisis Is So Big That It’s a Problem for Everyone - 22nd May 19
Crude Oil, Hot Stocks, and Currencies – Markets III - 22nd May 19
The No.1 Energy Stock for 2019 - 22nd May 19
Brexit Party and Lib-Dems Pull Further Away from Labour and Tories in Latest Opinion Polls - 22nd May 19
The Deep State vs Donald Trump - US vs Them Part 2 - 21st May 19
Deep State & Financial Powers Worry about Alternative Currencies - 21st May 19
Gold’s Exciting Boredom - 21st May 19
Trade War Fears Again, Will Stocks Resume the Downtrend? - 21st May 19
Buffett Mistake Costs Him $4.3 Billion This Year—Here’s What Every Investor Can Learn from It - 21st May 19
Dow Stock Market Trend Forecast 2019 May Update - Video - 20th May 19
A Brief History of Financial Entropy - 20th May 19
Gold, MMT, Fiat Money Inflation In France - 20th May 19
WAR - Us versus Them Narrative - 20th May 19
US - Iran War Safe-haven Reasons to Own Gold - 20th May 19
How long does Google have to reference a website? - 20th May 19
Tory Leadership Contest - Will Michael Gove Stab Boris Johnson in the Back Again? - 19th May 19
Stock Market Counter-trend Rally - 19th May 19
Will Stock Market “Sell in May, Go Away” Lead to a Correction… or a Crash? - 19th May 19
US vs. Global Stocks Sector Rotation – What Next? Part 1 - 19th May 19
BrExit Party EarthQuake Could Win it 150 MP's at Next UK General Election! - 18th May 19
Dow Stock Market Trend Forecast 2019 May Update - 18th May 19
US Economy to Die a Traditional Death… Inflation Is Going to Move Higher - 18th May 19
Trump’s Trade War Is Good for These 3 Dividend Stocks - 18th May 19
GDX Gold Mining Stocks Fundamentals Update - 17th May 19
Stock Markets Rally Hard – Is The Volatility Move Over? - 17th May 19
The Use of Technical Analysis for Forex Traders - 17th May 19
Brexit Party Set to Storm EU Parliament Elections - Seats Forecast - 17th May 19
Is the Trade War a Catalyst for Gold? - 17th May 19
This Is a Recession Indicator No One Is Talking About—and It’s Flashing Red - 17th May 19
War! Good or Bad for Stocks? - 17th May 19
How Many Seats Will Brexit Party Win - EU Parliament Elections Forecast 2019 - 16th May 19
It’s Not Technology but the Fed That Is Taking Away Jobs - 16th May 19
Learn to Protect your Forex Trading Capital - 16th May 19
Gold Ratio Charts Offer The Keys to the Bull Market - 16th May 19
Is Someone Secretly Smashing the Stock Market at Night? - 16th May 19

Market Oracle FREE Newsletter

U.S. House Prices Analysis and Trend Forecast 2019 to 2021

U.S. Treasury Bond Market Sell Off

Interest-Rates / US Bonds Mar 18, 2012 - 03:44 PM GMT

By: Tony_Pallotta

Interest-Rates

Best Financial Markets Analysis ArticleSlightly off topic Macro View this week as I really want to study the movement in treasury. The 10 year treasury yield is currently 2.30% which from an historical standpoint is very low. But a 33 basis point rise in one week is significant (100 basis points equal 1%). If the sell off in treasury accelerates things can get out of hand in very short order.


Already 30 year fixed rate mortgages have moved higher. These rates are also at historic lows but a fragile economy and housing market cannot handle much of a rise especially one as sharp as witnessed this week. The US rolls its debt between 4-5 years so a simple 50 bp point rise in five year yields equates to $75 billion in additional annual debt service.

Probably the most significant danger from rising rates is that to interest rate swaps, a derivative product that allows two parties to trade fixed for adjustable rates and vice versa. This is no small market. In fact in the first half of 2011 $100 trillion in additional swaps were sold. On their own interest rate derivatives are twelve times the size of the global economy.

The banks who wrote these contracts did so in a low interest rate environment. Such as ZIRP through 2014. If rates were to rise they would be on the wrong side of a truly massive trade and unable to meet their obligations.

OTC Derivative Market

(The above chart is through 2010)

When Operation Twist was formally announced in late September 2011 the common thought is it would flatten the yield curve which would be a negative for the banking sector. That premise was accurate as the spread between the 5 and 30 year maturities fell from 241 basis points (2.41%) on September 22, 2011 to 228 bp as of March 16, 2012.

But this selloff in treasuries is changing the shape of the curve. Since the first of the year the yield curve has steepened by 19 bp from 209 bp. One could argue that is a positive as a steeper yield curve encourages credit formation. But the problem is the yield curve is steepening because long term rates are rising something the economy simply cannot afford.

Yield Curve

So perhaps the Fed needs to begin another round of asset purchases and drive down long term rates. Problem is look at the inflation expectations as measured by treasury TIPS (Treasury Inflation Protected Securities). It is rising fast and well above the 2% target rate.

In other words inflation is becoming a bigger threat versus deflation that preceded all other long term asset purchase programs. Another round of asset purchases will not only "fuel oil prices" and crush the economy but further increase inflation which on its own will decrease demand.

Inflation Expectations

Bottom Line is this selloff in treasury cannot be allowed to continue much longer. The Fed can control the short end of the curve through ZIRP but the long end they simply have little control over. I have stated many times that the biggest threat to the US is not terrorism or Iran acquiring nuclear weapons but rather rising yields.

From an historic standpoint yields are very low and there is no reason to worry but the rate of this rise will not afford much inaction. In fact in a world where the amount of sovereign debt supply is growing faster than private capital higher yields may be necessary to simply attract capital. 2012 is the year of being able to sell sovereign debt even if that means equity prices must fall.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2012 Copyright  Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 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