“Woe to the land whose king is a child and whose leaders are already drunk in the morning. Happy the land whose king is a nobleman, and whose leaders work hard before they feast and drink, and then only to strengthen themselves for the tasks ahead”. (Eccl 10: 16-17)


"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat


Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


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Wednesday, May 14, 2014

Ten Year Treasury Yield Plunges

I am still trying to make sense out of what is happening in the interest rate markets this morning, given that strong PPI number. The yield on this key Treasury ( and one of my favorite indicators ) has plunged to the lowest level since October of last year!



From a technical analysis standpoint alone ( I am not considering anything fundamental ) the chart has experienced a downside breakout. There is one last level of chart support back at those October lows near 2.46 - 2.47%.

Did the Fed just start a new QE program and I missed it? Some of the Treasury buying in recent weeks has been attributable to safe haven flows related to events in Ukraine but that in and of itself is not sufficient to have produced the steady influx of buying in the Treasury market.

Why this is so noteworthy in my mind is that the Fed has provided forward guidance suggesting that while their tapering plans will proceed, no interest rate hikes are being considered until 2015-2016. Most of the big players split the difference and projected no hikes until mid-2015.

However, if the PPI, which is notoriously more volatile than the CPI, shows a trend towards higher wholesale prices, then that would bring into question any rate hike delay of that length of time. We really do need to see that CPI number tomorrow to get a sense of what is taking place.

As you can see, there are a lot of uncertainties right now. I can tell you one thing, mortgage company risk management departments must be spinning this morning. Imagine trying to initiate a hedging program in this environment. One day we are getting surging payrolls numbers and chatter of higher rates. The next day rates are plunging lower. No wonder we are getting the types of wild swings in prices in so many markets. Commercial hedging interests are also getting whipsawed and ripped to shreds let along hedge funds who are experiencing some sizeable losses.

Traders - be careful - watch the size of those positions you put on. Keep them manageable or you are going to end up with some big losses if you are not glued to your computer screen.

55 comments:

  1. Dead cat bounce in real estate is over. First time buyers priced out. Private equity all cash guys are done buying. Chinese can not buy all of Cal and Vancouver. Latins can not buy all of Miami. Russkis can not buy all of London and NY. Game, set, match. swb

    ReplyDelete
  2. How does it work for FED to wind down QE and at the same time pledge not to increase interest rates for a year or two? Is this like in USSR where the economy is preset by Polit bureau for the next five years, and the economy is so scared of the Gulags that it does not dare not to deliver?

    ReplyDelete
    Replies
    1. Abraxas;

      The QE programs were designed to keep LONG term interest rates artificially low since the Fed does not have ( or at least it did not have) any direct control over those. The short term rates are set by the Fed and those are what it is referring to in its recent guidance.

      Also, the QE programs are about supplying liquidity to the markets and we all know where most of that has ended up ( in equities).

      Short term rates are what are used to set savings accounts yields, CD yields,. etc.

      Delete
    2. Thanks for the clarification, Dan. It makes sense now. So, shouldn't we see the long term bond yields going up big time due to reduction/elimination of QE?

      Delete
    3. Abraxas;
      You're welcome!

      Yes, one would have expected the yields on the Long End of the Curve to rise - they are falling! I quipped last week that the timing of the Fed's tapering plans has to be one of the greatest bond trades of all time because they managed to taper just at the same time as a crisis broke out in Ukraine and a big safe haven flow into bonds took place just as they were reducing their rate of purchase.

      I am still trying to figure out exactly what is the rationale behind the move lower in yields. Stocks are acting a bit shaky but they are just off of all time highs so I cannot believe it is just some transitioning between stocks and bonds that could have taken yields down this low.

      If that is not enough, then we have a strong PPI number and crude oil prices remaining stubbornly elevated which adds even more confusion to the mix.

      just another "normal" day in our modern markets. too many computers....

      Delete
  3. Consumers broke. US bankrupt, bankers theft almost completed.

    ReplyDelete
  4. TLT holding, and today expanding, it's ytd lead over GLD.

    Who saw that coming? Not me.

    ReplyDelete
  5. Kid Dynamite has a great post up regarding gold manipulation.

    http://kiddynamitesworld.com/one-month-gold-manipulation-pictures/

    ReplyDelete
    Replies
    1. He is actually mocking those who keep talking about gold manipulation....LOL.....every time gold shoots up, he tweets that gold was manipulated....

      Delete
    2. I know. That's why it's such a great post. ;)

      Delete
  6. Dan -

    This might be a short term phenomena. Remember 2003-2009. When stocks were about to decline. . . inflation reared itself. Your saw it in commodities or the emerging markets. Or a late cycle transition.

    ReplyDelete
  7. Bonds may be anticipating the 'sell in may' of the stocks. also might be following the bunds that are liking the idea of QE in europe. Bonds are a good place to wait out russia, and if you sold russian assets a place to park the money.

    Bonds are doing the usual correlation with japan NIKK as well:
    http://stockcharts.com/h-sc/ui?s=$NIKK&p=D&yr=1&mn=4&dy=0&id=p24919170399&listNum=8&a=213176553

    ags look to be starting a correction off last friday usda report. since nov. beans are 2.60 below july beans, and many bean cargoes are said to be heading our way, $15 beans may be history for awhile!

    so many gold bug sites had writers calling for the demise of the us dollar the last few months, bleeeeeech. a true 'demise' and gold bricks will only be useful as door stops or for throwing thru window to get food!

    cheers!!

    ReplyDelete
    Replies
    1. 77 - that sounds as good an explanation as any right now!

      I am at a loss to explain what is going on in there. Something that a lot of us are unclear on is taking place under the radar however.

      Maybe it is as steve suggested and there are some subprime issues out there. I am just not sure.

      On beans - USDA reports on that old crop demand is keeping this market elevated. If that demand falters, then beans are in trouble. the big question is whether or not that will happen.

      Delete
  8. Dan,

    Silver fix ending is all over zerohedge and about the price limits coming on gold and silver. Does this all mean anything? Would appreciate a seasoned pro like yourself who has been right to comment on these developments not people who are long at 45/oz and 1800/oz.

    ReplyDelete
    Replies
    1. I think you qualified the comments yourself, just now.

      Delete
    2. Exactly if you are in long at those numbers it will take a long time to get back up, the fix will continue be it HFT's, limits, taxes, whatever capital controls in disguise. See the oil market, feel the market, if all heck breaks loose in Ukraine, Treasuries, currency markets, capital controls. I can hear Hitler speaking now..YOU VILL INVEST AS WE TELL YOU TO INVEST>>>

      Delete
    3. Bilal;

      I tend to be a "show me" person when it comes to this sort of stuff. In other words, I usually see them as having no impact on the futures markets but prefer to watch the price action and see what the majority of players are doing as far as interpreting any event.

      My main line of thinking is really rather simple - those who feed us the usual BS about silver being constantly manipulated by the powers that be are so far off track that I do not bother to pay attention to any of their comments or theories. The fact is for the last three years, silver has been a horrific investment. To fall from $50 to $20 and below shows one how poor a choice it has been.

      When the chart improves, then I will change my view towards it. For now, it continues to range trade between $19 on the bottom and $20 on the top. Maybe it will eventually break out in one direction or the other and then we can go from there. Until then, it is boring.

      frankly I am more interested in what is going on with the bond markets of late. Trying to read what is taking place is a challenge but the price action in the bonds is bullish, for now.

      Delete
  9. Dan, I think Santelli (the only guy worth a flip @CNBC) is right and that this is now Subprime 2 being brought to you by Mel Watt; swb

    ReplyDelete
  10. Dan,
    I noticed a few weeks ago, that despite good economic numbers yields weren't rising. I know the 10 year has had a safe haven bid, but as I made mention on this board, a couple of weeks ago, after some good news out of Ukraine, yields went up marginally, Also, its interesting that gold, silver, oil, and copper are up today. You could infer there up because of the high PPI number, but they were already higher before the number came out. I think this is the calm before storm. Something major maybe going on that just isn't apparent yet. Just a guess.

    ReplyDelete
  11. (Reuters) - U.S. Treasuries yields fell to six-month lows on Wednesday, breaking out of a recent range, as expectations the European Central Bank will cut interest rates sparked a global fixed-income rally.

    The ECB is preparing a package of policy options for its June meeting, including cuts in all its interest rates, and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).

    A dovish ECB has helped hold down yields on German and U.S. government debt. The bonds' yield moves are often correlated even though the U.S. is seen as poised for stronger growth than Europe, which many expect will eventually send Treasuries yields higher.

    "It reinforces the notion that from a global perspective monetary policy is forward committed to lower for longer," said Ian Lyngen, a senior government bond strategist at CRT Capital in Stamford, Connecticut.

    Short covering by investors who had bet that U.S. yields were set to rise, or at least hold in their recent range, added to Wednesday's rally.

    "We've broken out of the range that we've been in for quite some time," said Rick Klingman, a Treasuries trader at Societe Generale in New York. "Globally there's a fixed income rally going on ... people that thought the range would hold are being forced out of those positions."

    Benchmark 10-year Treasuries yields fell as low as 2.525 percent, the lowest since October 31, breaking below resistance at around 2.56 percent.

    ReplyDelete
  12. Some say the lower rates on the 10-year are simply due to expected lower inflation rates. But, a LOT of large fund managers got the direction completely wrong. When taper began, and speculation on the timing of the Fed funds rate increase kicked in to high gear, massive short positions were taken on the Treasury market. So, short-covering in the market is a major factor pushing yields lower. If those shorts get pulled, you could see a real scramble to Treasury rates. And who knows? Maybe we actually see it plunge back under 2.0%. If there is investor demand for 10-year Treasurys below 2.5%, this represents a paradigm shift and there will be a massive Treasury rally if that happens because of the huge short base that's been built. The question is what will this do to gold? If the rate drops below 2%, could we see gold rally above $1400 or to maybe even $1500?

    ReplyDelete
  13. Dan,

    Would you mind commenting on what you think will happen to Gold if, for argument sake, the 10-year Treasurys were to drop below 2.0%? this is what I'm trying to understand. Since 2012, there is a fairly strong inverse correlation between gold and 10-year Treasurys. Thanks!!

    ReplyDelete
    Replies
    1. Eric Webber;

      Yes, I agree that gold is tied very closely to interest rates. Rising interest rates had recently been putting pressure on gold since it is an asset that throws off no yield.

      It all comes down to the interest rate environment and whether REAL interest rates are negative or positive. If REAL interest rates move to negative, gold should find support. If REAL interest rates are positive, gold will struggle. What we would need to see is not so much the actual or nominal rate on the Ten Year but whether or not the rate of inflation stays low or moves higher especially in relation to what interest rates are doing.

      Make sense?

      Delete
    2. Ah, that does make sense. it is all about the REAL rate, which then ties in the current inflation rates. Perhaps this is something to watch going forward.....

      Delete
  14. Maybe the word got around that We never slowed down QE. The fed just outsourced it to Belgium.

    ReplyDelete
  15. it just keeps getting worse. i think it is foolish to believe that any market in the USA isn't rigged...

    http://wallstreetonparade.com/2014/05/duffy-tells-senate-futures-markets-are-not-rigged-as-futures-traders-file-lawsuit-alleging-a-%E2%80%9Cclandestine%E2%80%9D-conspiracy/

    ReplyDelete
  16. Where's Mark? I need to thank him for telling me to get out of MNKD!!! I listened to him (bc MNKD was at like $4) and I got out. Now that MNKD is at $7 I feel like Mark is similar to others he bashes... telling people what to do when they have NO CLUE...

    It's ok Mark, my lost opportunity, listening to you, only cost me $50,000... Thanks!

    ReplyDelete
    Replies
    1. @Nate, don't blame it on Mark and don't let anyone advise you / influence you. There is nothing worse than what you describe : being right but doing the wrong thing because you listened to someone else. Stick on your own decisions, no matter what.
      Learn from your mistakes afterwards, analyse their reasons, but don't rely on anyone regarding money, or you'll just get angry about many people :)

      Delete
  17. Dan,

    There are charts out there that actually shows when QE gets implemented stocks get the most benefit and then bonds sell off, and when QE ends (taper) bonds rally and stocks struggle. Just another classic example of a market looking forward and into the future.

    Makes sense really if one thinks about it. No more easy money means growth is most likely going to peak soon, especially in this anemic growth environment we are in and so a recession should be right around the corner. So bonds are responding accordingly and stocks, being always the last to respond, should fall soon.

    ReplyDelete
    Replies
    1. Jesse;

      That is an interesting set of comments... some good thinking... thanks for sharing it.

      Will be interesting to see the upcoming economic data releases to see if growth is slowing, increasing or remaining stagnant.

      Delete
  18. Hello,
    So silver and gold are still neutral without much of a trend imho.
    Silver's 2day candlechart bollinger bands stopped heading both down and are closer than ever now, squeezing prices between a very narrow range between 19 and 20. As I mentioned before, as long as we are within this, I'm not doing anything, though interesting signs are developing on the MACD going up, etc...but still too risky for me to do anything.
    But the longer the squeeze, the higher the probability of a strong move afterwards.
    As I don't live from trading, it is a luxury for me to just do nothing during an extended period of time :)

    ReplyDelete
  19. Hmm. Popular trend seems to be to fawn at Mark's feet... According to Nate (above), maybe Mark isn't so smart after all... heh

    ReplyDelete
  20. Just saw an interesting video of Jim Cramer.....he thinks the falling rates are due to low consumer spending and the new "frugality" of Americans. http://www.cnbc.com/id/101673552

    ReplyDelete
  21. Abraxas,

    Great Infographic about global crude oil price differentials and fuel price differentials. It furthers our conversation of a few days ago on this topic.

    http://www.zerohedge.com/news/2014-05-14/wheres-cheapest-and-most-expensive-gas-world

    ReplyDelete
    Replies
    1. Very interesting article, Andy. If I could find a way to somehow buy gas in kuala Lumpur and sell it in Scotland or Hong Kong ...
      Thanks for the link.

      Delete
  22. Looks like $1,300 is formidable resistance, as gold is once again dumped in favor of Unsecured Uncle Sam T-Bonds, the paragon of safety and security in the investment world.

    Nobody, I mean nobody, questions the integrity and the repayment ability of the U.S. government.

    Too much risk of "bail-in" in gold and silver, as repeated 20% price drops are way too common.

    Treasury bonds would never take a haircut like that.

    ReplyDelete
  23. Looks like USDX is having its best weekly gain ever.

    Anyone trading FX that shorted the breakdown based on "This Is It" or "The Story is Told Here" claims basically got their trading account wiped out if they went "all in" on the dollar breakdown theory.

    Never bet against the Fed, TPTB, or the TBTF banks.

    Stay in the System.

    ReplyDelete
    Replies
    1. We really do not have to bet on the FED Mark as the country is going the way of the Weimar Republic, Argentina, and several other examples. It is just done behind doors. If the interest rates rises it is game over. I hope your hype continues. You are wrong my friend.
      http://www.zerohedge.com/news/2014-05-15/russia-dumps-20-its-treasury-holdings-mystery-belgium-buyer-adds-another-whopping-40oing

      Delete
    2. Make sense now?
      http://usawatchdog.com/fed-laundering-treasury-purchases-in-belgium-to-disguise-whats-happening-paul-craig-roberts/

      Delete
  24. Same result as yesterday. Higher inflation = lower 10-year yields....LOL

    ReplyDelete
  25. Everything on my screen is red today, except Treasuries. You know, those "ponzi coupons", those "Certificates of Guaranteed Confiscation" as Doug Casey used to call them. They are the best asset class of the year. Better than stocks, better than metals. And it's already the middle of May, so this is no short term fluke. Go Figure.

    Don't Fight The Tape

    (Full disclosure: I've had my Mother and my Mother-in-law's accounts packed with TIP's for years. Now I wish I had some myself.)

    ReplyDelete
  26. greatly shrinking new supply of long bonds and my target of 138-140 is just about there. just sold some long position. shrinking federal deficit causes bonds to keep rising.

    ReplyDelete
    Replies
    1. Eph 6:7

      Thanks for the info... we can add this one into the list of possible explanations for the bond rise.

      One has to marvel at the ability of the Fed to taper and scale back bond buying and yet have no impact whatsoever on yields except to push them lower... amazing!

      Delete
    2. it does make me wonder. my hunch is that the Fed should have never taken on 85bil a month in the first place. I guess it demonstrates how big the USD is in world trade and finance that even those numbers causes barely a blip.

      Bonds were a one-sided trade for so long. people get lazy and got caught off guard. Who would think that dropping claims would spark bonds today. obviously something else is going on. Is this a blowoff top in long bonds or the shape of things to come?

      It was Zerohedge of all places that was talking about this. I know this economy is a sham in many respects, but the usFed's ability to keep yields low just leaves me speechless. Hats off to them. Bernanke was right in his famous 60 Minutes interview. The rank and file of society suffers, but the market numbers look good.

      Delete
  27. Watch out on the stock market if the BKX goes below 66; we will revisit the 2009 crisis; and maybe a lot worse. The government will have to start printing or risk a world meltdown. If the Ukraine is another match, lookout...

    ReplyDelete
  28. GDX/GLD ratio just plunged below .19 again.

    As usual, in the event of an equity market selloff, gold stocks go down 3x faster than everything else.

    Treasury bonds are soaring, that's the place to be right now.

    Nothing is safer than Uncle Sam or Uncle Abe sovereign debt, offering the lowest yields ever, because they are in such high demand for safety.

    Regardless of Debt/GDP numbers, trillions in deficits, none of that matters.

    ReplyDelete
    Replies
    1. Yeah Mark as long as the FED keeps buying them. That is all. There will be no safety in anything but GOD soon.

      Delete
    2. Mark, unless I am dumber than a sack of rocks, there will come the day when there is no bid for either Yen or Nikkei; swb

      Delete
  29. LUKE 10:18-20
    And he said to them, "I was watching Satan fall from Heaven like lightening. Behold, I have given you authority to tread on serpents and scorpions, and over all the power of the enemy, and nothing will injure you. Nevertheless, do not rejoice in this, that the spirits are subject to you, but rejoice that the names are recorded in heaven."

    ReplyDelete
  30. Lets also hope our Military is as strong as everyone thinks it is.

    This could also be helping the "destruction of capital" in stocks. Remember when you were a kid and kept trying to touch the bottom. Every time you went down you could not find it. Well..who knows? http://www.zerohedge.com/news/2014-05-15/russia-will-hold-massive-air-drill-along-ukraine-border-ukraine-presidential-electio



    ReplyDelete
    Replies
    1. WW
      The US military is not as strong as thought. In search of budget reduction and PC they are reducing training and strength in favor of having a spotless workforce. The more rough and tumble warrior class are being discharged.

      Delete
  31. http://wallstreetonparade.com/2014/05/internal-graph-at-cme-shows-how-the-futures-market-is-rigged/

    ReplyDelete
  32. Dear people,

    Something thought is driving me crazy like there is splinter in my mind for a while.
    Its a theory why the gold and silver price is “controlled / contained” to abnormal low levels. It also applies for mining shares. I have the following assumptions:

    1) Quantitative easing, or the creation of money out of the blue, DEVALUES the currency which is created
    2) This “fresh” created money can be used to buy all forms mining equipment to dig up gold and silver .
    3) The gold and silver found by this equipment can be dumped onto the market, or give as a present to the Chinese. Why? Because of point 4)
    4) When gold and silver are dumped onto the market, this usually has a negative price effect on the asset (gold / silver).
    5) A declining gold and silver price, makes the “currency” more strong, which eliminates the effect of step 1
    6) repeat step 1

    Does steps 1 to 6 explain all what is happening to the gold and silver market and mining shares the recent dramatic years?

    Please convince me the above is not true.

    Forgive me my bad English

    Thanks in advance

    ReplyDelete
    Replies
    1. Michael - to test your theory, check out Joy Global's sales (better than CAT as they are more mining specific). Revenue went from 5.6billion in 2012 to 4.7 billion TTM. So point 2 in incorrect.

      Point 3 doesn't make sense in that the stock of gold above ground is something like 165K tons, annual mine production is something like 2K tons. IE, Gold is not consumed & price is not set by annual production. It's the sine qua non of gold investing/trading.

      Delete
  33. Dan what are your thoughts on these recent theories that the US isn't actually tapering at all but instead buying bonds through a proxy. In this case Belgium.

    http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2014/5/14_Financial_Destruction_%26_The_Last_Great_Systemic_Earthquake.html

    http://www.zerohedge.com/news/2014-05-15/russia-dumps-20-its-treasury-holdings-mystery-belgium-buyer-adds-another-whopping-40

    It makes no sense to me that the Feb can taper and rates fall, even taking into account the possibility of sell on rumour buy on news of these tapers.

    We know pretty much every market is rigged in one way or another and one may argue as to the extent to which this happens.

    Could it be that the Feb is in fact buying bonds and not disclosing them? This may also explain why stocks haven't yet been dumped despite the so called taper. It's hard to know what to believe these days isn't it. If this is the case I certainly hope the truth comes out about this bond buying.

    ReplyDelete

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