Treasuries Update after Today’s Market Selloff
Guest post by Doug Short.
The Fed’s latest strategy for managing the economy,Operation Twist, has less than two months to go. The program was announced on September 21st of last year with the stated purpose of selling $400 billion in shorter-term Treasury securities by the end of June 2012 and using the proceeds to buy longer-term Treasury securities. The Fed assumed this would put downward pressure on longer-term rates, which would stimulate the economy through “a broad easing in financial market conditions.” In other words, more loans at lower rates.
How effective has this strategy been? Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.
QE to Infinity and Beyond!
Biderman on QE to Infinity!
Then, in May 2010 and again in May 2011, the stock market started a sell-off that lasted several months. Will that happen again this year? I actually do think we are at the start of another stock market decline.
Why? Because the ups and downs of the stock market are all due to the actions of the Federal Reserve. It is their money we are playing with.
Before the Fed took over control of the stock market, new money for stocks used to come from the amount of wages and salaries and other income not spent, also called savings. But no, not anymore.
In March 2009, the Fed announced an $800 billion QE1. Stock prices, which were cut more than half to a $9 trillion low from a $22 trillion peak in 2007, soared back to $17 trillion by April 2010, recouping 70% of the top to bottom decline in stock market prices.
On the other hand, how did the overall economy do during QE1? Nowhere near as well. While stocks recouped 70% of the decline, taxpayers after tax income, including capital gains, barely rose by the end of QE1.
QE1 ended in March 2010, From May 2010 stock prices dropped from $17 trillion, to just over $15 trillion by August 2010. Then in August 2010, the Fed announced stimulus package two, a $600 billion QE2. Stocks took off again and peaked at just over $19 trillion at the end of April 2011; two months before QE2 ended.
Video below.
Is “Operation Twist” Working?
Guest post by Doug Short.
The Fed’s latest strategy for managing the economy,Operation Twist, has about 10 weeks to go. The program was announced on September 21st of last year with the stated purpose of selling $400 billion in shorter-term Treasury securities by the end of June 2012 and using the proceeds to buy longer-term Treasury securities. The Fed assumed this would put downward pressure on longer-term rates, which would stimulate the economy through “a broad easing in financial market conditions.” In other words, more loans at lower rates.
How effective has this strategy been? Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.
Fed Intervention and the Market
Guest post by Doug Short.
We’re well into our sixth month since the latest Federal Reserve intervention, Operation Twist, was officially announced on September 21. We’ve now seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three month before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the bankruptcy of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy). The thud to the FFR bottom coincided with the first of two rounds of quantitative easing in an effort to promote increased lending and liquidity.
If a picture is worth a thousand words, this chart needs little additional explanation — except perhaps for those who are puzzled by the Jackson Hole callout. The reference is to Chairman Bernanke’s speech at the Fed’s 2010 annual symposium in Jackson Hole, Wyoming. Bernanke strongly hinted about the forthcoming Federal Reserve intervention that was subsequently initiated in November of 2010, namely, the second round of quantitative easing, aka QE2.
Treasuries Update: A Look at Recent Volatility
Guest post by Doug Short.
Treasury yields have been a bit of a roller coaster ride for the past few months. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st announcement last year of Operation Twist. Despite the Fed’s stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11. But in mid-March the yield on the 10 surged to a closing high of 2.39 on March 19th and then declined to a hover range around 2.23.
Today’s disappointing jobs report triggered a bond rally with the yield on the ten falling to 2.07 at the close, a decline of 12 basis points from the previous close.
Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.
Expect the positive market performance to give it all back
Biderman on why to expect a correction soon.
In 2010 the S&P 500 rose almost 5% the first three months of that year and then popped an additional 3% in April before topping out the second trading day of May. Then the S&P 500 dropped 13% by the August 2010 low.
Similarly 2011 mirrored 2010 as the S&P 500 rose a bit over 5% the first three months of that year and climbed an additional 3% in April 2011 as it did in April 2010. Then starting the first trading of May, the S&P plunged 18% by the August 2011 low.
In other words, the stock market in 2011 mimicked a similar trading pattern to what happened in 2010 for the entire year. And I would not be surprised if 2012 is the third year in a year that the stock market rises the first four months of the year before plunging over the next few months.
Why has the stock market risen the first part of each of the past three years? The answer is simple. The Fed has front loaded money printing each year, QE1 in 2010, QE2 in 2011 and Operation Twist this year.
Full video below.
To QE or not to QE
From PIMCO’s Tony Crescenzi on the QE issue, Fed and Bernanke’s choices.
- If the Fed does nothing, asset prices could fall, threatening America’s fragile economic recovery. But if the Fed decides to battle the forces of deleveraging, it could commit a classic error by acting during a turning point and thereby doing too much.
- During Operation Twist, the Fed will absorb the equivalent of all of the issuance of U.S. Treasury securities maturing beyond seven years. When Operation Twist ends, global investors will be left to shoulder the burden.
- The combination of stronger economic data and rebounding inflation expectations makes it more likely that the Fed will hint at rather than decide on QE3 when it meets again on April 25th.
Like Hamlet, Federal Reserve Chairman Ben Bernanke faces a choice; whether to “QE or not to QE,” which is to say whether or not to conduct a third round of Treasury, agency and/or mortgage-backed securities purchases in order to fend off the ravages of the deleveraging process. In other words, whether the Fed should conduct QE3 – a third round of quantitative easing.
Operation Twist and the 30-Year Fixed Rate Mortgage
Guest post by D Short.
Yields have risen rather noticeably in the past six trading sessions. The 10-year note had been hovering around the two percent level for the past few months after hitting its historic low of 1.72 immediately following the September 21st announcement of Operation Twist. Despite the Fed’s stated purpose of lowering long-term interest rates, the 10-year steadily rose to an interim high of 2.42 on October 27th, but it soon settled into a pattern of hovering around 2.00 with the one quick dip to 1.82 and an upper range of 2.11.
The pattern now appears to be changing. The 10-year closed at 2.14 on March 13, a one-day increase of ten basis points, and since then it has pushed upward to closing lows of 2.39 and 2.38 — just below the interim high of last October.
Tomorrow we’ll get the latest Freddie Mac weekly rate on the 30-year, which is also beginning to rise. Meanwhile bankrate.com’s latest update on the 30-year fixed is north of four percent at 4.07%.
Here is a snapshot of selected yields and the 30-year fixed mortgage since the inception of Operation Twist.
Operation Twist Expiry coming up
Biderman on the markets. To sum it up, keep close to the exit….
Last year, at the start of 2011, the stock market was boosted by the impact of QE2, and after rising just over 10% year to date by the end of April, two months before QE2 ended, the stock market started to sell off eventually dropping more than 20%. Two years ago in 2010, after a similar seemingly healthy 10%+ gain to start the year, stock market also started to sell off by the end of April, also plunging by more than 20%.
How quickly we forget the past. This year, the bulls are hoping that this time the US is in a real recovery. Unfortunately it is not. The job market is growing, by about 100 to 150,000 new jobs per month, but no where near the 250,000 bogus jobs reported by the Bureau of Labor Statistics. Similarly wages and salaries so far this year are growing by about 3% year over year, a rate of gain roughly equal to inflation, but no where near the 5% nonsense number estimated by the Bureau of Economic Analysis.
Finally the housing market is also reportedly improving numbers based upon seasonally adjusted numbers boosted by an exceptionally warm January and February. The reality, as I have previously reported on my video blog, is that the housing market is still at least a year away from a bottom, let alone a recovery.
To repeat, the only source of new money with which to buy stock is coming from companies buying back many more shares then they are selling. However, that could be changing. Full video below.
Fed Intervention and the Markets
Guest post by Doug Short.
Over five months have passed since the latest Federal Reserve intervention, Operation Twist, was officially announced on September 21. We’ve now seen several bouts of aggressive Fed attempts to manage the economy following the collapse of the two Bear Stearns hedge funds in mid-2007 about three month before the all-time high in the S&P 500.
Initially the Fed Funds Rate (FFR) underwent a series of cuts, and with the bankruptcy of Bear Stearns, the Fed launched a veritable alphabet soup of tactical strategies intended to stave off economic disaster: PDCF, TALF, TARP, etc. But shortly after the bankruptcy filing, the Fed really swung into high gear. The FFR fell off a cliff and soon bounced in the lower half of the 0 to 0.25% ZIRP (Zero Interest Rate Policy). The thud to the FFR bottom coincided with the first of two rounds of quantitative easing in an effort to promote increased lending and liquidity.
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