On Wednesday I spoke about the strange action in treasuries in Treasuries Safer Than Cash.The same action is back today and even stronger. This time we also see it in TIPS.

Here is a snapshot of what Curve Watcher’s Anonymous is looking at today.

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Treasury Action

  • The 3 month T-Bill plunged to .21
  • Yields on 3-Mo and 6-Mo were falling
  • Yields on the 2-Yr, 5-Yr, and 10-Yr were rising
  • Yields on the 30-Yr were falling

TIPS Action

  • Yields on the 5-Yr and 10-Yr were rising
  • Yields on the 20-Yr and 30-Yr were falling

The Dreaded D Word

Professor Bennet Sedacca is also focusing on treasuries. Here is Bennet’s perspective yesterday in regards to corporate bonds from a historical viewpoint.

The dreaded D word…

What is it the Treasury market smells? Deflation.

MZM is off the charts. M3 is off the charts.

The Fed tries to plug it’s finger in the dike. You would expect the economy and rates to respond. But nope, straight down they go.

Incidentally, folks have asked me if I think corporate yields will fall as well over time. My answer is no. See the chart below, courtesy of NDR.

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Focus on the 1930’s. Treasuries went to 0.5 and BBB corporates went to 11. Ugly stuff.

The 30-Yr Yen Basis Swap

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The above chart is courtesy of professor Fil Zucchi who took a snapshot of the 30-Year Yen basis Swap near the close yesterday.

Inquiring minds no doubt want an explanation of currency basis swaps to help explain the above chart. For that, let’s take a look at the Financial Times article The America premium? This could hurt.

A basis swap transposes the floating rate in one currency for the floating rate in the other, such as yen libor for dollar libor. So a fund invested in Japanese government bonds might opt to swap the fixed JGB rate for a floating yen rate, before swapping that again to the dollar rate. In this instance, the investor would usually received libor minus the swap spread.

Such a deal is sometimes described as getting the same credit in another currency. But within the trade there remains an element of counterparty risk. The last time the swap moved in this fashion was back in the 1990s, when concerns about the Japanese banks prompted the so-called “Japan premium.”

Now the situation appears reversed. Counterparty concerns about the US banks may have prompted funds to start unwinding their trades. Now it’s starting to look like a stampede to get out, with no bid on the swap.

As over leveraged players attempt to get out of various carry trades here are two more dreaded words: “No Bid”.

Indeed, Alphaville is noting “Anecdotally, one fund is said to have kissed goodbye to about a year’s profit getting out of this trade.” As far as I am concerned they should be thankful to get out alive.

Mike “Mish” Shedlock
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