Treasuries cracking now: "financial Krakatoa"

[*T*]

I hate to "do a Mega", but Across the Curve says,

The yield curve is losing its curve and is about to go perpendicular. The 2 year/30 year spread is closing the day at 356 basis points. I have recounted many times here that the widest level for that spread since man has walked erect was at 369 basis points in October 1992. The yields were 3.60 and 7.29 percent, respectively.

Some cite the very strong 2 year note auction today as a sign of the market’s health. I think not. The issue is propped up by the prospect of a very low funds rate for an extened period of time. The carry and ride down the curve profits are seductive.

A long tail in a bond auction with its attendant risk is one thing. If that were to occur in a shorter maturity in would be a sign that investors are in full retreat from longer dated US assets.

Maybe the final climactic event is upon us. Maybe the final bubble to burst is the US Treasury market and maybe we are on the verge of a financial Krakatoa which will realign financial markets.

Whatever the case it feels like the calm before the storm and we are about to embark on another interesting expedition.

CBs are the only players left and they are working their way down the maturities to CASH - then what?

Party's over folks!

[cjppjc]

Re: Treasuries cracking now: "financial Krakatoa"

I hate to "do a Mega",




Remember, Mega is The Master of British Brevity. Based on this post you're safe.

[*T*]

Re: Treasuries cracking now: "financial Krakatoa"

Remember, Mega is The Master of British Brevity. Based on this post you're safe.

I am but his humble disciple.

[cjppjc]

Re: Treasuries cracking now: "financial Krakatoa"

I am but his humble disciple.

Well, you got a lot to learn:p


But thanks for the link.

[portobellovcs3]

Re: Treasuries cracking now: "financial Krakatoa"

I am expecting a strong stock market decline to boost demand for the US Dollar and US Treasuries (at least in the short term) as has been discussed in a few articles posted on Market Oracle. I would think that at this time it is more important to "save" Treasuries than the equity markets. Crashing the equity markets is the surest way to get people piling back into USD/UST. Your thoughts?

[Jay]

Re: Treasuries cracking now: "financial Krakatoa"

I am expecting a strong stock market decline to boost demand for the US Dollar and US Treasuries (at least in the short term) as has been discussed in a few articles posted on Market Oracle. I would think that at this time it is more important to "save" Treasuries than the equity markets. Crashing the equity markets is the surest way to get people piling back into USD/UST. Your thoughts?

Or fear of war.

[metalman]

Re: Treasuries cracking now: "financial Krakatoa"

I am expecting a strong stock market decline to boost demand for the US Dollar and US Treasuries (at least in the short term) as has been discussed in a few articles posted on Market Oracle. I would think that at this time it is more important to "save" Treasuries than the equity markets. Crashing the equity markets is the surest way to get people piling back into USD/UST. Your thoughts?

who's gonna crash the equity markets? timmy's treas dept?

[jtabeb]

Re: Treasuries cracking now: "financial Krakatoa"

I am expecting a strong stock market decline to boost demand for the US Dollar and US Treasuries (at least in the short term) as has been discussed in a few articles posted on Market Oracle. I would think that at this time it is more important to "save" Treasuries than the equity markets. Crashing the equity markets is the surest way to get people piling back into USD/UST. Your thoughts?

I think you got it spot on, not much more to say than that. Hang on, FDI is setting up for it's next leg down.

[flintlock]

Re: Treasuries cracking now: "financial Krakatoa"

I am expecting a strong stock market decline to boost demand for the US Dollar and US Treasuries (at least in the short term) as has been discussed in a few articles posted on Market Oracle. I would think that at this time it is more important to "save" Treasuries than the equity markets. Crashing the equity markets is the surest way to get people piling back into USD/UST. Your thoughts?

Or into commodities.

But yeah, I think you're right. In the short term treasuries will hold up. By the end of the summer, who the heck knows?

[allenjs]

Re: Treasuries cracking now: "financial Krakatoa"

The article theorizes the following:

Look at the breakeven spread on the 10 year TIPS bond. That spread is currently 185 basis points. I do not believe that we have been that wide since the advent of the financial crisis in 2007. I think that investors are uttering a gigantic and collective nyet regarding the implementation of monetary policy and fiscal policy in the US. That is why the curve is steepening so dramatically.

By "uttering a gigantic and collective nyet", does he mean that investors are betting against inflation? If so, wouldn't this be a golden opportunity to buy TIPS?

[cjppjc]

Re: Treasuries cracking now: "financial Krakatoa"

The article theorizes the following:



By "uttering a gigantic and collective nyet", does he mean that investors are betting against inflation? If so, wouldn't this be a golden opportunity to buy TIPS?

Don't over think this.

[mmr]

Re: Treasuries cracking now: "financial Krakatoa"

If Treasury had to manipulate only one market, in the near term, they might actually choose the equity market, as long as the 30 year bond stays under 5% or 6%.

- The vast majority of Treasury borrowing is done in maturities inside of 10 years, and so in the near term, higher 10 or 30 year rates don't really affect government interest costs
- While fixed mortgage rates are generally tied to long bonds, prices have come down so much that affordability is still "reasonable" compared to 2004-7 (assuming, of course, that you have a job and can come up with a 3% down payment for your FHA loan)
- Steep yield curve = massive boost in bank net interest income, with about a one quarter lag; hence, no need for TARP 2
- The MSM mentions the Dow every day, which is presumably positive for consumer confidence, which justifies higher equity values, and so on. I suspect that 80%+ of the population would reach for the remote within five seconds after hearing the words "30 year treasury yield" - until mortgage rates reach 7%+, very few will understand / care

As long as Treasury can roll their T-bills every 90 days, everything will be fine - I doubt that we're quite there yet. (July may be a different story...)

[metalman]

Re: Treasuries cracking now: "financial Krakatoa"

If Treasury had to manipulate only one market, in the near term, they might actually choose the equity market, as long as the 30 year bond stays under 5% or 6%.

- The vast majority of Treasury borrowing is done in maturities inside of 10 years, and so in the near term, higher 10 or 30 year rates don't really affect government interest costs
- While fixed mortgage rates are generally tied to long bonds, prices have come down so much that affordability is still "reasonable" compared to 2004-7 (assuming, of course, that you have a job and can come up with a 3% down payment for your FHA loan)
- Steep yield curve = massive boost in bank net interest income, with about a one quarter lag; hence, no need for TARP 2
- The MSM mentions the Dow every day, which is presumably positive for consumer confidence, which justifies higher equity values, and so on. I suspect that 80%+ of the population would reach for the remote within five seconds after hearing the words "30 year treasury yield" - until mortgage rates reach 7%+, very few will understand / care

As long as Treasury can roll their T-bills every 90 days, everything will be fine - I doubt that we're quite there yet. (July may be a different story...)

all very good points. most folks have no idea what their house is worth. the dow is there every day. when it's down it's 'it'll go up soon' and when it's up it's 'see it went up'. no one will notice higher rates until they try to buy or refi and volumes are so how many notice? who own's long tbonds? i don't. you?

of course, i have perfect confidence these nitwits who allowed this mess to go down know how to fix it.

[Guest]

Re: Treasuries cracking now: "financial Krakatoa"

No Jtabeb - you got that back to front - it's set for it's next leg UP according to the above thesis. (this is the DOLLAR index we are talking about)

I think you got it spot on, not much more to say than that. Hang on, FDI is setting up for it's next leg down.

[jtabeb]

Re: Treasuries cracking now: "financial Krakatoa"

Don't over think this.

Agreed, "Golden" and "treasury" are not in the same league, let alone ball park.