Monthly Archives: December 2017

Strangeways Here We Come

Stop me if you think you've heard this one before:

I've got this thorn in my side about the short end in a coma and heaven knows I'm miserable now.

The EDZ18 has fallen 63 bps since Sept and the EDZ19 has dropped 70. The decline has moved the relationship from 13 to 18+.  Large on a percentage basis but still way too close for my liking. The EDZ21 back into 2019 is pancaked into 11.

The overall success (so far) of walking back the ZIRP has led many to suggest, rightfully so, that Janet (Sheila) take a bow. The ash heap of naysayers and bubblers has grown deep with the bones of the pedestrian populist fringe. Still, the somnambulist dirge higher in forward STIR is making me uncomfortable about the New Year. Under "normal" circumstances, the 33bps between the 2nd and 6th gyro would be closer to 150 by now. Careers were made buying the out narrow relationships and letting roll into wider near-bys.

Other developed country curves remain far more twisted and upside down  than ours. That is a fact that only increases tolerance of the uncomfortable not acceptance. Discussions of the US yield curve have focused too far along the Ts while everyone's perfect math keeps the color coded Eurodollars in line. I'd keep an eye on 'em and remember its not the level - its the relationship between.

All rights to Johnny Marr.

Trouble with the Curve

Here we are a few hikes and a few holds down the "Exit" ramp and yield curve tourism is swinging into peak season. Having spent many now non-retrievable hours of my life lead timing and lagging various arcs of said curve into and out of the major economic events of my past life; I present a quick ditty for your dining and dancing pleasure.

I have learned that most curve tourism is focused on the easily digestible slope of the T-curve, a canary with little coal mine exit door location prowess. A small sample of the points from the last mistake and today:

2006 March, May, June FF - 4.75, 5.0, 5.25 (rapid eh?#GIK)

Model Equil FF Rate for same months - 3.95, 4.25, 4.47

That's approx 75bps of stringency the way I look at things and of course a year later the Fed was hacking the rate from 4.75 to 4.25 just as quickly - but far too late.

For reference the 5 yr T yield was between 4.95 and 5.10 over the time frame.

and this is quite jocular -

Presently, you could say the FF rate is 1.37 (right down the middle of the corridor) and the model determined equilibrium rate is 1.44.  Conservatively on the bright side of neutral but fold in a fairly aggressive tax cut and an historically low unemployment rate, and it actually tilts toward a tad "easy" still.

Having trouble with the curve? You're looking in the wrong place.


The New Face of Losses

Yesterday, buried on the back page of the B Section of the WSJ, there was a big dose of graphic eye candy under the heading : The New Face of Treasury Auctions. I highly suggest you give a lookie-loo.

Under the rose colored analysis - "Today, domestic bondholders account for greater than half of the more than $14T in marketable debt outstanding." Less than 15% of T purchases were by foreign investors, down from nearly 43% ! Yay Baby Boomers amiright? Um, NO.

For the 25 years prior to 2009, when the US citizen was less than interested in bonds and bond funds, real yields were higher and inflation was in the strong phase of a 30 year decline. The Street is less involved in Uncle Sam's IOUs than any time since modern financial deregulation. Secured lending is replacing LIBOR wholesale funding as trillions of notional  back month Gyros slowly melt off the expiry. All Bond desks to Janus.

As we have stated on this blog many times before, a seminal moment in markets is a page turn in a history book but years when unfolding. Deemed "Certificates of Confiscation" in the 80's at 5+% real yield and coveted by the public now, Bonds remain our favorite disdain. The WSJ may think its swell that John and Jane Boomer are plowing more money than ever into bond funds but we see it as the necessary action of the end.

Remember the Bond Trader's mantra : There are no bad bonds, just bad bond buyers.