$TYX (Thirty Year Yield) Looks Cheap

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The bad news? A yield curve inversion appears imminent. RSI for the 30yr Yield shows a divergence meaning it is likely to head lower (sending 30 yr prices higher). Conversely, the 10yr looks expensive and therefore likely to head lower (yields higher). Not good for the equity bulls unless something major changes, soon. The tectonic plates are shifting. Be ready...
My buddy @MichaelSedacca has pointed out to me astutely that we've already priced out all of QE3, Twist, and part of QE2 in the bond market. The more I think about that, the more it says to me about where the media's mouth is versus where price is, because they're at opposite extremes currently. Oil above $110 is a bigger story for most of us. Michael Paulenoff pointed out today on the Buzz that the last two trips above $110 preceded 10% & 20% corrections. Good luck everyone - nect week looks crazy!
finitemonk DuncanParker
My knowledge depth of markets doesn't extend so deep, but I know what I see, a feel ... Reading all comments etc. & because of my study of USDJPY (fascinates me for it's market microcosm quality): your last comment resonated the most: next week is sure beyond complicated
andrewunknown DuncanParker
The dovish contingent of the FOMC - Bernanke, Yellen, et al - has been completely taken aback by this persistent spike in UST (and MBS) yields. Their policy orthodoxy doesn't permit for this move on the basis of "tapering": only tightening. For them, because the stock outstanding they hold is still increasing - even while monthly LSAP may taper - yields "ought" to remain low. The bond market, put simply, thinks that's hilariously misguided - so misguided that you have a 10y challenging 3%, rapidly catching up to the long end. Funny thing is, the FOMC's communication efforts - their fourth, stealth policy tool - via forward guidance, etc. are all about perception management, which is consonant with the flow effect - something that the Fed seeks to minimize, mostly because it has only knock-on, indirect control over it, at most. The Bernanke Fed's ZIRP policy orthodoxy structurally excludes from consideration the very thing driving yields higher. In effect, the Fed has been saying "look only at what we have done and are presently doing" - but USTs are singularly interested in what the FOMC *will* do. That is why Bernanke said the FOMC was "puzzled" in June. Given yields and the most recent FOMC, that puzzlement continues.
So long story short.. Bernanke and FOMC puzzlement has us expecting no taper in September
andrewunknown QuantitativeExhaustion
yep. Those we "trust" to know admittedly do not know; and our willing misconception based on cryptic allusions to taper timing by non-voting members assumes they know what they don't really know. Of course, not knowing doesn't mean they won't act - they may see fit to taper in their ignorance, which may or may not be the right choice. It should comfort us all that the ship of monetary policy is being helmed and manned by blind sailors treading in waters off the map with miscalibrated navigational instruments aboard a ship they're still building with "unconventional" flotsam they happen to recover from a sea of tenuous economic data and policy ideology.
DuncanParker andrewunknown
The lack of control over the belly, in my opinion, is a huge red flag that this entire experiment is bordering on failure. Reducing taper is not "tightening" per se. In fact, it should be thought of as a bullish vote of confidence. Because the Fed is committed to keeping the ultra short end liquid, the next obvious choice for market participants to express their concern is in the 10yr. Many have been too quick in claiming the expansion of money supply under QE hasn't/will not cause inflation because it has not happened "yet." To further the "ship" analogy, the money supply tanker is far out to sea -- it's going to take some time for the sewage to arrive on the shoreline. Therefore, it could be that "smart money" is bracing for an inflationary shock (perhaps in-part from a commodity super cycle?) and a faster tightening Fed. Meanwhile, the rest of us have been duped by the reduction in taper as reasoning for the rise in yields. The only thing every Fed Chief has done since the beginning is make huge policy mistakes. The Fed is likely "puzzled" because they think they are the dog and cannot be wagged. What they fail to realize is that they are the tail; entirely submissive to a board of bank chairmen (...Basel, too) that tells them "The Fed is in charge" and the Fed falls for it over and over again. They aren't in charge now just as they weren't in 2002/03 or 2008. We still have some time for this ship to right itself, but we need to see wages for the middle class double or even triple in the next ten years to handle the debt load burden. Not talking about minimum wage - arguably, increasing minimum wage will increase the number of American's below the poverty line as it becomes inflationarily relevant; if major corporations pay the same wages (no increase in twenty years & taking inflation into consideration wages have DECREASED for the middle class over this period) then it's only a matter of time before those in poverty vs. the middle class experience some sort of reversion to the mean where all are mired in the mediocrity brought upon by consolidating the two classes into one. I doubt this will happen because I don't think the people will stand for it as it unfolds. However, my belief in the people does not supersede my belief that all parties involved will wait until the line has been crossed before unifying in action. Long story short - We could be headed for some sort of revolution. There's no clean way out of this unless wages increase dramatically, immediately. The first premise is well under way in achieving its objective, the latter isn't even being considered by the masses. Therefore, advantage goes to the objective in motion and therefore the possibility of world financial system collapse which thereby increases the probability of revolution in western societies. The confilct in Syria is almost a side show at this point - it's all about money. Russia & China have been waiting a long time for something like this to happen to the US. No wonder Putin seems so relaxed of late... It's not my intention to beat the drum of conspiracy; rather, it's my understanding of financial markets that dictates the hypothesis. Further, I don't put all of the blame squarely on the Fed, either. Politicians had an eternity (five years) to stymie the quadmire and getting us going in the right direction. They've failed us all, they've failed the world. This cannot be ring-fenced - everyone on Earth stands to suffer.
So it looks like our charts are telling us Bernanke misspoke. We will not see taper in September or we have priced in a taper.
Headed in that direction. If the 10 yr keeps going, equities might only back off modestly. But it may not - especially if something from 09/17-09/18 stops it dead in its tracks. Question is: what's the distribution of labor between the 10/30 spread and stocks to close the gap here? -->
DuncanParker andrewunknown
Interesting, Andrew. Thanks for sharing. Honestly, I need a few minutes to wrap my head around that chart - don't recall thinking about it that way previously. Anecdotal - I'm not sure what on 9/17 - 9/18 could cause a reversal given this rise in yields started back in May when "Tapir" was still a nasty animal known for spraying crowds at zoos with urine. (True) The Fed has attempted trickery to tame the ten since then, which has been a humbling failure. They've lost control of the short end while it would appear a much larger hand is intent to hold firm the long end. To me, what it really says is that the Fed never had any control to begin with. If 2008 taught me anything, it's that the long end yield has nothing to do with return and everything to do with fear in a low interest rate environment. Make no mistake, the 30 year is screaming fear right now (in my opinion). What we're witnessing today is complete irrationality in the treasury market. If I'm right, history will dictate how simplistically rational the current price action is. I hope I'm wrong. This doesn't appear the makings of an ordinary 50%+ decline in equity markets; this is a new beast - a mutant beast far more sinister than anything mankind has ever encountered. We have no way of knowing how to defeat it, but no excuse for not recognizing its stripes.
DuncanParker DuncanParker
...and just like in 2008, an inverted yield curve doesn't me we can't still attempt to rally to new highs in the weeks following an inversion. Three months or so after the inversion is when the shiznit hit the fan back then. Is still remember Santelli pulling his hair out on CNBC when we were rallying in an iyc environment. Stuck with me as an important and poignant observation in an otherwise permabull market. Today is no different; nothing's changed for the better and has arguably never been worse - if one knows where to look and how to interpret what they see. I know you know - not worried about us, but the complacent are about to be dealt an unimaginable setback that will take years to digest in hindsight. The thesis where 2008 was just a tremor is playing out - it's about to get real. I know this all sounds crazy and, to many, unimaginable in the face of such stellar econ data, earnings, etc., but looking beyond the headlines reveals only meat hooks being oiled before transporting the next carcass to butcher. The Endgame has just entered its second act, and it promises to be an unparalleled psychodrama.
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