Tag Archives: Bonds

US Treasury 10-Year Yield Breaks Out, Mortgage Rates Jump to Highest in 7 Years, by Wolf Richter

The yield on the 10-year treasury note has been trending irregularly upwards since July 2016. Today it set a new high for the move. From Wolf Richter at wolfstreet.com:

But no blood in the streets. Just a rate-hike cycle at work.

Today the US Treasury 10-year yield broke out of its recent range and surged 8 basis points to 3.08% at the close, the highest since July 2011. The price of a bond falls when its yield rises.

The odds have been stacked against the bond market for a while: the Fed’s rate-hike cycle, the Fed’s QE Unwind, a surge in government spending, the tax cuts, and the ensuing onslaught of debt issuance that is looking for buyers.

In addition, and with impeccable timing, the biggest US corporations with the most “cash” parked “overseas” are now “repatriating” this “cash” and are using it to buy back their own shares. What this really means for the bond market is this: This “cash” isn’t cash but is invested in securities, mostly US Treasury securities, corporate bonds, and the like. Companies are now selling those securities in order to use the proceeds to buy back their own shares at a record pace. So these huge bond buyers have turned into net sellers.

In other words, to entice enough new investors into the market, yields have to rise to make those bonds more attractive.

While short-term Treasury yields have been rising for a couple of years in a fairly consistent manner, longer-term yields are not so well-behaved and, despite the Fed’s efforts to push them up, are subject to messy market forces and speculative positions, including large short positions. And so the 10-year yield has moved in leaps followed by some backtracking until the next break-out and leap. Note that the most recent back-track only lasted a couple of months and barely shows up on this chart:

The two year yield ticked up to 2.58%, the highest since July 2008:

The difference (spread) between the two-year yield and the 10-year yield widened from 45 basis point to 50 basis points (0.5 percentage points), as the 10-year yield rose faster today (by 8 basis points) than the two-year yield (3 basis points).

To continue reading: US Treasury 10-Year Yield Breaks Out, Mortgage Rates Jump to Highest in 7 Years

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Rating agencies warn, Illinois flirts with junk, by Ted Dabrowki and John Klingner

The mystery is why anyone still considers Illinois bonds investment grade. They’ll be junk soon enough. From Ted Dabrowki and John Klingner at wirepoints.com:

llinois’ brutal political campaigns may have distracted attention from the reality of the state’s crumbling finances, but an upcoming $500 million bond borrowing by the state will remind investors and Illinoisans alike how little has improved.

Both Moody’s and S&P recently affirmed Illinois’ one-notch-above-junk rating in preparation for the state’s upcoming bond.

And Moody’s continues to maintain a negative outlook on Illinois’ rating. That means a downgrade by the agency is more likely than an upgrade in the next year.

The reasons for the rating agencies’ pessimism are obvious. It’s not just what lawmakers have failed to do, it’s what lawmakers continue to do that’s dragging the state down.

The state continues to operate at a deficit despite nearly $5 billion in new taxes in 2018. And the shortfalls aren’t being compensated with spending reforms. Instead, the state continues to primarily use interfund sweeps to make the general budget balance. And the agencies don’t expect any big reforms this year – not with a stalemate that might ensue during this campaign season.

Bond investors are demanding a heavy price from Illinois for the increased risk they are being asked to take.

According to Municipal Market Data, Illinois will pay yearly interest rates that are 2.1 percentage points higher than the states with the best credit ratings – states that include Indiana, Iowa and Missouri. By comparison, states like Connecticut and New Jersey, states with severe pension crises, only pay about 0.85 percentage points more than the best-rated states. Illinois and its taxpayers are being heavily penalized for the state’s fiscal and governance mess.

To continue reading: Rating agencies warn, Illinois flirts with junk

So What Do I Think about the “Crash” in Stocks? by Wolf Richter

So far, despite the pyrotechnics, markets have not crashed. From Wolf Richter at wolfstreet.com:

A lot more will have to happen before this turns into a crash; and markets are not there yet.

With all this wailing in the media about stocks, you’d think there’s at least some blood in the streets. But no. Not a drop.

The Dow fell 4.6% today to 24,345. This 1,175-point drop, as it was endlessly repeated, was the biggest point-drop in history – but irrelevant given how relentlessly inflated the industrial average had become. The percentage drop today, combined with the drops of last week, took the Dow down just 8.5% from its all-time high on January 26.

For the year, the Dow is down merely 1.5%. I mean, what horror. The last time this sort of debacle happened was way back in ancient history of January and early February 2016.

The Dow is not even in a correction (defined as -10% from its recent high). But that messy Friday and Monday, following a record 410-day streak without a 5% decline, did break the recently pandemic illusion that you cannot lose money in stocks.

When the Dow gained 1,000 points in the shortest time ever, after having already booked the fastest-ever 1,000-point gains in prior months and years, no one was complaining about it. These rapid-fire 1,000-point-gains had become the new normal. So today, one of those 1,000-point gains has been unwound.

The S&P 500 dropped 113 points, or 4.1%, to 2,648. This took the index back to December 8, 2017. The past six trading days were the worst decline since … well, since the weeks leading up to February 7, 2016, at which point the S&P 500 was off 19%, not quite enough for a dip into an official bear market.

The Nasdaq fell 272 points today, or 3.8%, to 6,967, below 7,000 for the first time since the end of December, but remains, if barely, in positive territory for the year.

What’ll happen next? Dip buyers will come in, maybe at this very moment, or maybe later, and some of them will likely get plowed under, but there is way too much cash lined up in hedge funds specifically set up to profit from sell-offs. And dip-buyers have been rewarded relentlessly over the past eight years, and it’s not until the dip buyers get massively destroyed and stop dip-buying that the market is in real trouble.

Because nothing goes to heck in a straight line.

To continue reading; So What Do I Think about the “Crash” in Stocks?

“It’s The Turning Point” – Bond, Stock Slump Sparks Worst Week For ‘Risk-Parity’ Since 2013 Tantrum, by Tyler Durden

Sometimes a few graphs are worth thousands of words. From Tyler Durden at zerohedge.com:

Yesterday’s US equity market collapse and simultaneous bond market bloodbath was the biggest combined loss since December 2015, but perhaps more ominously, the week’s combined loss in bonds and stocks was the worst since Feb 2009.

Many suggested that Friday’s slump was GOP-memo-related, and it may well have removed some froth, but judging by the major correlation regime shift between stocks and bonds that started on Monday, we suspect this is something considerably more worrisome for investors.

Even JPMorgan admits that the bond market sell-off gathered pace over the past week raising concerns about its impact on equity markets. This is especially because the bond-equity correlation, which has been predominantly negative since theLehman crisis, has started creeping up towards positive territory.

The 90-day correlation between stock (SPY) and bond (TLT) markets has surged ominously in the last few weeks…

In turn this raises concerns about de-risking by multi-asset investors who depend on this correlation staying in negative territory such as risk parity funds and balanced mutual funds? How worried should we be about de-risking by these two types of investors?

Very.

Judging by the impact on Risk-Parity funds yesterday (worst single-day performance since August 2015’s flash-crash)…

And this week (worst weekly drop in Risk-Parity funds since June 2013’s Bernanke Taper Tantrum)

As mentioned above, these types of investors benefit from the structurally negative correlation between bonds and equities as this negative correlation suppresses the volatility of bond/equity portfolios allowing these investors to apply higher leverage and thus boost their returns. But, as JPMorgan points out, the opposite takes place when this correlation turns positive: the volatility of bond/equity portfolios increases, inducing these investors to de-lever.

In the past, just as we have seen this year, these risk-parity-correlation tantrums have been cushioned by equity market inflows, and we note that, in particular, YTD equity ETF flows have surpassed the $100bn mark, a record high pace.

If these equity ETF flows, which JPMorgan believes are largely driven by retail investors, start reversing, not only would the equity market retrench, but the resultant rise in bond-equity correlation would likely induce de-risking by risk parity funds and balanced mutual funds, magnifying the eventual equity market sell-off.

To continue reading: “It’s The Turning Point” – Bond, Stock Slump Sparks Worst Week For ‘Risk-Parity’ Since 2013 Tantrum

Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash, by Tyler Burden

Here is what the head of the world’s largest hedge fund has to say about the bond market. From Tyler Durden at zerohedge.com:

Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous DV01-crash warning to the NY Fed from October 2016, Bridgewater’s billionaire founder and CEO Ray Dalio told Bloomberg  TV that the bond market has “slipped into a bear phase” and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,”Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market’s DV01:

… it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Dalio is referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that’s the P&L loss from a 100bps rise in rates.

The watchdog found that “valuations are also elevated” in bond markets. Of particular interest is the OFR’s discussion on duration. Picking up where we left off in June 2016, and calculates that “at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index.”

 

To continue reading: Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash

What Will Rising Mortgage Rates Do to Housing Bubble 2? by Wolf Richter

Rising interest rates will increase the cost of financing a house with a mortgage. If they go up enough, expect the housing market to falter. From Wolf Richter at wolfstreet.com:

Oops, they’re already rising.

The US government bond market has further soured this week, with Treasuries selling off across the spectrum. When bond prices fall, yields rise. For example, the two-year Treasury yield rose to 2.06% on Friday, the highest since September 2008.

In the chart, note the determined spike of 79 basis points since September 8, 2017. That was the month when the Fed announced the highly telegraphed details of its QE Unwind.

September as month of the QE-Unwind announcement keeps cropping up. All kinds of things began to happen, at first quietly, without drawing much attention. But then the trajectory just kept going.

The three-year yield, which had gone nowhere for the first eight months of 2017, rose to 2.20% on Friday, the highest since October 1, 2008. It has spiked 82 basis points since September 8:

The ten-year yield – the benchmark for financial markets that most influences US mortgage rates – jumped to 2.66% late Friday.

This is particularly interesting because the 10-year yield had declined from March 2017 into August despite the Fed’s three rate hikes last year, and rising short-term yields.

At 2.66%, the 10-year yield has reached its highest level since April 2014, when the “Taper Tantrum” was winding down. That Taper Tantrum was the bond market’s way of saying “we’re shocked and appalled,” when Chairman Bernanke dropped hints the Fed might eventually begin tapering what the market had called “QE Infinity.”

The 10-year yield has now doubled since the historic intraday low on July 7, 2016 of 1.32% (it closed that day at 1.37%, a historic closing low):

Friday capped four weeks of pain in the Treasury market. But it has not impacted yet the corporate bond market, and the spread in yields between Treasuries and corporate bonds, and particularly junk bonds, has further narrowed. And it has not yet impacted the stock market, and there has been no adjustment in the market’s risk pricing yet.

To continue reading: What Will Rising Mortgage Rates Do to Housing Bubble 2?

Bond Market Smells Inflation, Begins to React, by Wolf Richter

The bond market probably topped out in July 2016. Interest rates are starting to move up again. From Wolf Richter at wolfstreet.com:

Inflation expectations now exceed the Fed’s target.

The 10-year US Treasury yield breached 2.5% on January 9 and hasn’t looked back since, closing on Friday at 2.55%. The three year yield closed at 2.12%, the highest since October 2008. The two year yield, after breaching 2% on Friday intraday, closed at 1.99%, the highest since September 2008.

Bond prices fall when yields rise. And the selloff in three-year maturities and below shows that the short end of the bond market is reacting to the Fed’s rate-hike environment.

The moves in the 10-year yield, however, defied the Fed in much of 2017, with the yield actually dropping. With long-term yields falling and short-term yields rising, the yield curve “flattened,” and there were fears that the yield curve would “invert,” with 10-year yields dropping below two-year yields – a scenario that has proven dreadful in the past, including just before the Financial Crisis. But recently, the 10-year yield too has begun to respond.

Though the “new Fed” in 2018 hasn’t fully taken shape yet, with several key vacancies still to be filled, there is already tough talk even among the “doves.” And that’s where tough talk matters.

On Thursday it was New York Fed President William Dudley who outlined the “two macroeconomic concerns” he is “worried about”: “The risk of economic overheating,” and that the markets are blowing off the Fed. In the end, the Fed “may have to press harder on the brakes,” he said.

On Friday, it was Boston Fed President Eric Rosengren who told the Wall Street Journal that he expected “more than three” rate hikes this year to get this under control before it’s too late. “I don’t want to get to a situation where we have to tighten more quickly,” he said, citing specifically the “fairly ebullient financial markets,” and the risks of waiting too long.

These “doves” are worried that the Fed will have to speed up its rate hikes to get a grip on asset price inflation, wage inflation, and consumer price inflation before they become difficult to control.

To continue reading: Bond Market Smells Inflation, Begins to React, by Wolf Richter