Fixed Income Overview and Strategies – Chase for Yield is On
Guest post by Peter Tchir.
The Year End Yield Chase
Closed end fixed income funds continued their bounce, high yield ETF’s had inflows, and much of what we discussed last week came true.
The move the prior week was rational. We saw steep declines in closed end funds on a combination of big premiums, leveraged assets, and dividend tax confusion. This helped push all credit markets lower. Credit moved not just with the other “risk off” trades but with fear and confusion that retail in particular was having a mass exodus from fixed income.
That wasn’t true and isn’t likely to be true anytime soon.
I am the most bullish I have been. I think we will see continued strength in credit into year end at this point. I am making a key assumption here that the fiscal cliff will be dealt with in a way that benefits the markets. I expect a deal that has minimal impact in the next 6 months to a year. At the Ben Bernanke luncheon this week, it seemed clear to me that is what he is telling congress. So congress is being told not to raise taxes and not to cut spending in the near term but by the Chairman of the Federal Reserve. That seems to be a policy that congress can get on board with, as can kicking seems to be their specialty.
Are Treasuries the Worst Investment in the World?
Guest post by Azizonomics.
I admit the headline is a little sensationalistic, but after Wednesday’s WTF bond auction, I feel like slapping the market around the face with a rotten fish. Now certainly there are plenty of penny stocks headed to greater losses far sooner. And certainly, lots of people have made good profits on Treasuries by buying them and flipping them to a greater fool or a central bank. On the other hand, so did many on during the NASDAQ bubble, or during the ’00s ABS bubble. Bubbles are profitable for some, and that’s why there have been so many throughout history. But once the money starts to dry up they become excruciatingly painful.
Treasury yields are just going lower:
The Treasury Bubble
Guest post by Azizonomics.
What are the classic signs of an asset bubble? People piling into an asset class to such an extent that it becomes unprofitable to do so.
Treasury bonds are so overbought that they are now producing negative real yields (yield minus inflation):
That’s right, after taking into account inflation, many investors in treasuries are standing over a drain and pouring their money down it.
And so America’s creditors are now getting slapped quite heavily in the mouth by the Fed’s easy money inflationist policies.
I propose (much, I am sure, to the consternation of the monetarist-Keynesian “print money and watch your problems evaporate” establishment) that this is a very, very, very dangerous position. And I propose that those economists who are calling for even greater inflation are playing with dynamite.
See, while the establishment seems to largely believe that the negative return on treasuries will juice up the American economy — in other words that “hoarders” will stop hoarding and start spending — I believe that negative side-effects from these policies may cause severe harm.
Prices Should Fall This Tax Season
Biderman’s comments.
US taxpayers in April 2011 sent $140 billion to the US Treasury. While I have no idea how much taxes will be paid this April, I am pretty sure that billions of dollars in stocks still will be sold to pay taxes. That should keep pressure on stock prices the rest of this week, everything else being equal.
The biggest story today is that the financial markets were shocked, shocked that Friday’s jobs number was disappointing. After all, the Bureau of Labor Statistic had been guessing that an average of 250,000 new jobs were created each month, after seasonal adjustments, from December to February. Over that same time frame there appeared to be an improving trend in weekly new unemployment claims.
What I am most shocked about is that almost everyone on Wall Street seems to believe that the Bureau of Labor Statistics initial estimate of new jobs and unemployment claims are as accurate as if they were generated by a ticket taker counting admissions. The Wall Street Journal, the New York Times, the talking heads on CNBC, other than Rick Santuli, all did not voice any reservations what so ever about the quality of the BLS number. Not one report stated that the initial BLS job number often gets revised dramatically up and down before getting finalized years later when the income tax returns are totaled up. (Full reading here).
Video below.
Federal Reserve System
Interview with Michael Hudson on the Fed. Via Terra America.
What is the place of the Federal Reserve System in the American financial and economic structure?
Prior to the Federal Reserve’s founding in 1913, U.S. monetary policy was conducted by the Treasury. Like the Fed, it had district sub-treasuries that performed nearly all the financial functions that the Fed later took over: providing credit to move the crops in autumn, managing government debt, and so forth.
But after the severe 1907 financial crisis, a National Monetary Commission was reformed. Under the then-Republican administration, it recognized a need for more active government intervention to prevent future financial crises. It also recognized the desirability of moving away from the Anglo-Dutch-American system of “merchant banking” based on short-term lending against collateral in place, or for shipping of goods already produced. The National Monetary Commission’s longest volumes were on the great German industrial banks, and Republican policy aimed at bringing banking into the industrial era, to provide long-term funding after the model of German and other Central European banks.
Identifying a Treasury Crash
Guest post by Azizonomics.
Readers have asked my opinion on whether or not China and Russia’s recent treasury offloading spreeamounts to the first phase of the Great Treasury Crash I have predicted.
Here’s a reminder for those of you with short memory spans, or new readers:
There are two very strong pieces of evidence here for dollar and treasury weakness: firstly, the very real phenomenon of negative real interest rates (i.e. interest rates minus inflation) making treasury bonds a losing investment in terms of purchasing power, and secondly the fact that China (the largest real holder of Treasuries) is committed to dumping them and acquiring harder assets (and bailing out their real estate bubble). So the question is when (not if) these perceptions will be shattered.
A large sovereign treasury dumper (i.e. China with its $1+ trillion of treasury holdings) throwing a significant portion of these onto the open market would very quickly outpace the dogmatic institutional buyers, and force a small spike in rates (i.e. a drop in price). The small recent spike actually corresponds to this kind of activity. The difference between a small spike in yields and one large enough to make the (hugely dogmatic) market panic enough to cause a treasury crash is the pace and scope of liquidation.
Negative Rates, Ja Vol!
So, the Economy is doing so great, that investors now eagerly want to pay the US to lend them money. With negative rates, this is simply crazy, but people are obviously obsessed with the return of the money, than the return on the money. The craziness goes on as the Comitee obviously thinks this is a great idea for investors. From the latest minutes;
He also noted that bid-to-cover ratios remained at healthy levels for all Treasury securities, with particularly high demand for 4-week bills. The elevated bid-to-cover ratios in 4-week bill auctions in late December were related to the rule that bounds bill auction stop-out rates at zero. The question was asked if it made sense for Treasury to permit bids and awards at negative interest rates in marketable Treasury bill auctions. DAS Rutherford noted that there were operational issues associated with such a rule change, but that the hurdles were not insurmountable. It was the unanimous view of the committee that Treasury should modify auction regulations to permit negative rate bidding and awards in Treasury bill auctions as soon as feasible. Rutherford noted that any decision on this policy change would likely be made at the May refunding. (full press release here).
What if market reversed here? Contra indicators are calling….
Many are abandoning the bear positions during this prolonged Santa rally. Volumes have been rather poor, despite yesterday’s volume increase. Market has been losing volume for a long time. Today we have been getting those contra indicator calls. “This market won’t go down, vix implies there is no risk in this market“. Now is probably a great time loading up on downside puts, just in case…..Guest post by Macro Story.
I don’t believe this market is going to come to a specific level and reverse giving an all clear signal to go short and or exit longs. The basis for that statement is in late July 2011 the market experienced a minor pullback off no major technical level that quickly turned into a major decline of 220 SPX points in less than two weeks.
The one signal that was given in July as is being given now is that of price action in the US Treasuries (UST). The equity market began slowly selling off while at the same time UST began slowly breaking out of a bull flag pattern. The two were needed in tandem I believe for UST needed the added capital flow that an equity selloff offered to break out.
Right now UST is at a very similar period as that which preceded the July 2011 selloff. The two year is right at all time highs while the five year is at a five month high and less than 0.3% from an all time high. The rest of the curve, the ten and thirty year are not far behind. All of these moves were supported by very heavy volume on Wednesday.
Treasury Futures And Equity
Guest Post by Macro Story.
I want to revisit a few posts and references to the possible breakout of US Treasury futures and its impact on equities. The reason being the last time treasuries broke out and reached all time highs the equity market experienced a sharp and sudden selloff.
There is no guarantee the same thing happens but the data is too hard to ignore and assume the divergence between both asset classes can simply continue.
July Selloff
Below is a chart that compares the SPX, TNX (10 year treasury yield) and AUD/USD (the risk on currency). What I found interesting is that AUD/USD played no role in causing the selloff. In fact AUD/USD lagged by a few days before finally moving lower.
What really got the equity selloff going was when TNX took out prior low yields as shown on the chart. The US debt downgrade and equity head and shoulder’s failure all came after treasury broke out. Why I mention this is to simply look for AUD/USD weakness as a sign of an equity selloff may not be the most accurate gauge.
Rigged Markets
There is just too much information coming out of Europe in order for the human brain to focus on other important news. The Corzine event today, which is actually a very big event, drowns and disappears in the Euromezz news flow. The other important news that got some attention last week, was Hank Paulson’s information to a small number of people with big pockets. Irrespective if one thinks this is borderline information, at least morally, there is a bigger story to it, namely the markets are increasingly influenced by politicians,central planners (and HFT Algos). The combination of the above, might just make people sick of the rigged markets, and they’ll leave it. NY Post reports;
Among his regular phone buds was Lloyd Blankfein, who, for example, spoke six times with Paulson on Sept. 18, 2008. That was a day of great market turmoil and — while there is no way of knowing what the two men spoke about — the calls did coincide with a major turnaround in stock prices.
That was just one example.
and further we go
the US markets are rigged, with the elite and connected getting a distinct unfair advantage over the rest of us schlumps.
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