Bloomberg says a Treasuries Weekly Slide Is Most Since November on Fed Outlook.
In contrast, Curve Watchers Anonymous notes treasury yields barely moved.
A couple of pictures can help clarify things.
US Treasury Yield Curve Monthly Chart
US Treasury Yield Curve Monthly Chart
Inverted Action
Yield on the long bond rose a trivial 3 basis points.
Bloomberg noted the 2-year yield rose “surged 13 basis points this week, the biggest climb since the week ended Nov. 6. The 10-year note yield rose 14 basis points this week, also the most since November.”
It’s pretty amazing that the biggest weekly bond selloff in half a year is a measly 14 basis points.
The real story, that Bloomberg missed completely, is the short end of the curve is rising faster than the long end.
If the economy was truly strengthening, the long end of the curve would be rising far faster than the short end as more hikes get priced in.
The actual action is recessionary-looking. If the Fed manages to get in a couple hikes (I am still extremely skeptical), the already compressed yield curve is likely to get flatter and flatter.
Anyone smell a “reverse operation twist” in a first-ever attempt to force up the long end of the curve up?
A flat yield curve is not conducive to increased bank lending or bank profits. So let’s see how many hikes the Fed gets in.
Mike “Mish” Shedlock
In these times the Fed has to talk a good game. Talk up the economy, talk up growth and talk up interest rates. It is all about sales. The US is trillions in debt and needs money from every corner of the world to finance it. Talk sells T Bills and helps keep the deficit ball rolling.
“If the Fed manages to get in a couple hikes (I am still extremely skeptical), the already compressed yield curve is likely to get flatter and flatter.”
Getting more and more to resemble the guessing games about the old Soviet Central Planning Politburo or the Chinese leadership. Maybe they should just “monetize” the whole process and sell interest rate basis point increases or decreases to the highest hedge fund bidders, modeled on the way the Popes used to sell indulgences to raise revenues. I mean, if it is not going to be a real free market anyway, just get right to the corruption but do it openly.
Given the micro-magnitude of the “moves,” I can see why you would need to leverage up to 40 trillion to squeeze out several billion. For that reason seems to me that the flatness will of speculative necessity increase leverage; so a real “surge” or even a “head-fake” from a “rumor” or some “electric static” could trigger a multi-trillion dollar derivative event.
In other words, some unexpected turbulence suddenly hitting a massively leveraged flat system could have some large and unexpected consequences. Since the FED historically messes up with its rate hikes, I would bet them going that way.
Standard bank lending is already unprofitable, due to interest not covering administration plus default rates. Thus their foray into the derivative casino.
Don’t even ask about European bank loan profitability with negative interest rates.
Reverse Op Twist equals less interest being circled back to Treasury….perhaps the Fed’s hubris will be its nemesis, Treasury will print directly…just some wishful thinking on a dreary Sunday morning.
Long-term rates (ie. 10-year UST) are the expected average of future short-term rates over that period.
IMHO, the 10-year Treasury at 1.85% is still way too high – implying that short-term rates will average 1.85% (approximately). That is a five-fold increase from where we are now and also implies that short-term rates will actually be “normalized” (however briefly) at some point during the next 10 years.
Given the astronomical amount of government, corporate and personal debt that constantly needs to be re-financed, I don’t see that happening. No way.
Other than their impact on confidence, which has been harmed by their actions, the Fed and President can only follow the Invisible Hand. You can drag a horse to water, but if he’s not thirsty, forgetaboutit.
Businesses and individuals are rightly concerned about the future and naturally save. The desperate actions of govt to save itself, which means higher taxes, fees, penalties, and civil asset forfeitures; coupled with the bankster’s short-sighted preference for austerity, which only destroys the demand for loans, insures deflationary forces will remain for at least the next couple of years.
No matter what the Fed does, the only inflation will be in the taxpayer expenses “required” to fund the lifestyle of bureaucrats, which will provide the pinch to get the masses off the couch to oppose the establishment. If you think the level of anger is high now, just wait until Joe Sixpack sees the impotence of their beloved govt when it gets destroyed by the Invisible hand in this game of political armwrestling.
The invisible hand has been handcuffed by government intervention, regulation and destruction of price discovery mechanisms. It can no longer do it’s job. It is going to be a long slow grinding process to the totalitarian control of “government by emergency.”
As stated before, compliance is voluntary at first, then it becomes mandatory. We are well on the way, now that money is no longer the property of the people. For .gov to exert control over the means of production, it will simply seize control of the very capital that makes production possible. The next step, into cashless, finishes off the process.
Mish, I’ve been a subscriber for several years. Please refrain from referring to Elizabeth Warren as Pocahontas. The name is derisive and ugly. You can disagree with Warren without resorting to such insults.
Thanks.
JoEllen
Well – I never once in my life referred to Elizabeth Warren as Pocahontas.
So, I have no idea what you are talking about.
Mish
Forward guidance seems to work well after a collapse but not the other way around.
Technically speaking a June rate hike means only one down from the four to start the year. The Fed is still monetizing (another 25 billion in MBS’s?) an according to ZH this will balloon to trillions again as all the short dated they monetized starting in 2008 has to be monetized again as the Banks can’t take the stock. Would appear Banks are raising capital big time now too for fear they may indeed have to start buying back some of those trillions…or more likely a fear of a sudden inflation brought on by a collapse of the tax base and the Banks’ unwillingness to lend into all the massive amount of State and Local debt about to be issued.
Spending and benefits have obviously hit.the chopping block for that sector.
None of this is growth positive implying higher rates, slower growth, more defaults, or worse.
The “Summation of All Fears” looks pretty ugly unless you’ve been 100% gold or silver this year.
If equities sell off again that will push up interest rates for private borrowers…dramatically so I would imagine.
The Fed doesn’t want that so in my view they are and will continue to hyperinflate (driving down rates to zero and driving equities up) until you get a second Nixon Price Shock.
We already have the mayhem as someone forgot to install an off switch on the internet.