Tag Archives: Interest rate spreads

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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“Where Will It Stop?”: Libor Spread Blows Out Beyond Eurocrisis Highs, Central Banks Intervention Awaited, by Tyler Durden

This article is somewhat technical, but the upshot is that key short-term interest rate spreads are climbing, which is often an indication of lurking financial stress. The OIS is the overnight indexed swap rate, and the FRA is the forward rate agreement rate, for those unfamiliar with those acronyms. From Tyler Durden at zerohedge.com:

Until two days ago, the critical level for both the Libor-OIS and FRA-OIS spread was the “psychological level” of 50bps. This, however, was breached on Wednesday when as we reported Libor pushed significantly higher without a matching move in swaps. And yet, despite the sharp push wider, both spreads remained below the peak levels observed during the European sovereign debt crisis of 2011/2012, with some speculating that open central bank swap lines at OIS+50bps would limit the move wider.

That changed this morning when the day’s 3M USD Libor fixing jumped higher for the 27th consecutive session, rising to 2.2018% from 2.1775%, and the highest since December 2008. And, as has been the case for the past two months, the move was again not matched by OIS, resulting in the Libor-OIS spread jumping to 51.4bp, surpassing the 2011/2012 highs and the widest level since May 2009.

At the same time, the FRA-OIS also spread spiked to a new multi-year high of 53.3bps, the highest in years.

Commenting on the move, NatWest Markets strategist Blake Gwinn urgent clients “don’t fade FRA/OIS’ recommendation is still in effect, but certainly on watch”, adding that the most frequently asked question this week has been “where will Libor stop?

While the clear answer – at least for now – is not here”, Gwinn repeated what we said on March 14, noting that the Fed’s central bank swap lines should “theoretically put a cap on USD funding rates” as the banks are authorized to offer terms out to three months at OIS+50bp, and also echoed BofA’s comments on the topic, noting that among the impediments are haircuts that add roughly another 10bp to the effective rate, the stigma of going to central banks for funding, and lack of availability of swap lines.

And yet, should Libor keep pushing wider, the Fed will have to notice.

To continue reading: “Where Will It Stop?”: Libor Spread Blows Out Beyond Eurocrisis Highs, Central Banks Intervention Awaited