Here’s the Fed’s recent hike in context, courtesy of BofAML’s Hartnett et al. You might need to squint…
When you’re done squinting, you might also dwell on the fact that long-term rates matter much more than short-term rates in the US and that we might be about to enter “conundrum” territory once again, Read more
There’s no good way to separate the duration risk premium — the compensation investors get for locking up their money for long stretches rather than constantly rolling it over — from a long-term bond yield, although plenty of people try.
A recent blog post by economists at the New York Fed gives a flavour of the challenge. You can see their results in the following chart, which attempts to decompose actual 10-year interest rates (blue) both now and in the future into pure measures of expected short-term interest rates (red) and what they call the “term premium” (yellowish): Read more
In a previous post we noted Greenspan shouldn’t have been confounded by the “conundrum” he identified in 2005, and promised a longer explanation of this claim. To refresh, here’s the full argument he made during his semiannual testimony to Congress:
Long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields.
We haven’t seen any commentary on this yet but the Australian yield curve has been flattening like a pancake this year:
A funny thing has happened since the Federal Reserve announced it would begin cutting back on its bond-buying on December 18, 2013: the yield curve has flattened like a pancake.
Remember Australia’s inverted yield curve in 2012?
Spain and Italy successfully auctioned short-term debt this morning, a result that some say was the result of funds raised at the ECB’s three-year LTRO being put to work.
It wasn’t just the short-end of the government curves that got a boost, the long-end also moved down: Read more
Interesting chart from Ruslan Bikbov at BofA Merrill Lynch.
The narrative around the Fed’s announcement on Wednesday is that it went ahead with a $400bn ‘twist’, towards the larger end of what was expected — despite some pretty heavy pressure from the Republicans a couple of days earlier.
But was the launch of Operation Twist such a fearless easing measure, after all? Read more
The US Treasury would accommodate a possible Federal Reserve stimulus to drive down long-term interest rates, the FT says, citing a person familiar with the Treasury’s thinking. The effectiveness of ‘Operation Twist’ would depend on how the Treasury reacted. If it pushed the other way, and took advantage of the Fed’s buying to sell more long-dated debt, then it could minimise the effect on interest rates. However, the Treasury would be unlikely to respond to falling long-term interest rates with a sudden shift in the pattern of debt issuance, even though one of the Treasury’s strategic goals is to increase the average term of the US national debt.
Strange, fast, markets. The S&P 500 closed at 1,172.53, up 53 points, or 4.74 per cent. That’s the biggest one day rise since 20 October, 2008. 10-year Treasury yields touched crisis lows. And the US dollar… don’t even ask.
The Bond Buyer has a story on Thursday highlighting strong demand for tax-exempt municipal bonds, which despite recent tightening are still trading at above 100 per cent of comparable US Treasuries at the long end of the yield curve.
The “magic” 5% tax-free yield is sustaining strong demand from retail investors. Read more
For the commute home, where no-one criticises your fiscal policies,
- More on Goldman’s bearish commodities turn. Read more
Ooo, now this is interesting.
Revealed in the latest minutes from the Federal Open Market Committee — a secret Fed video conference to discuss über-quantitative easing. Or, targeting an explicit yield (or ‘ceiling’) on the long-term US Treasury. From the minutes: Read more
QE2-as-bank-bailout continues with a Friday op-ed by Andy Kessler, a former hedge-fund manager and author of “Eat People—And Other Unapologetic Rules for Game-Changing Entrepreneurs”.
As we’ve noted before, there’s something odd about the Federal Reserve’s second round of quantitative easing. Instead of trying to flatten the US yield curve, the Fed’s Treasury purchases look like they’re almost aimed at steepening it. Read more
Some weird goings-on in the Irish yield curve.
(Nicked from Frankfurter Allgemeine — the Ireland curve is the brown-ish one) Read more
This is the market’s view of the 30-year Treasury at the moment.
The Fed doesn’t always live up to market expectations.
Some traders had been expecting the central bank to buy 30-year bonds as part of its Wednesday QE2 announcement. But the long bond has largely been left out of the latest US Treasury-purchasing programme, with buying focused in the four- to 10-year range. Cue, as we noted post the announcement, hefty 30-year reaction. Read more
Spotted in the realm of US mortgages — an increase in rates. Read more
A new paper from the Fed’s finance and economics discussion attempts to shed light on the flow and stock effects of large-scale Treasury purchases — in other words, quantitative easing. By and large, the $1,700bn purchase programme announced in 2009, had an average yield reduction effect of about 3.5 basis points, with the shift across the whole of the yield curve due to the purchases equal to about 50 basis points. But most interesting, really, is their opinion about the scale of the effects even despite the forewarnings given by the Fed ahead of purchases. Read more
And the bond band played on. Wednesday’s instalment — the US yield curve flattening below 200 bps between the 2-year and 10-year:
In pic-form — one drag on US bank earnings:
It’s bullishness, but not as we know it.
Here’s the Nomura take on investing in a world beset by a slowing US recovery: Read more
Dave Rosenberg is enjoying his moment.
On Thursday the Gluskin Sheff man took to his morning notes to answer one of the big questions regarding the Fed’s last — and future — bout of quantitative easing. Back in early 2009, the Fed set out to stimulate the economy by flattening the yield curve with its QEasing. It worked initially, but then yields began creeping back up. What then, will be different this time? Read more
Some commentators and analysts have lauded the Fed’s Tuesday decision to begin reinvesting more than $150bn in annual proceeds from maturing mortgage-backed and agency securities into Treasury debt.
But others echo the suggestion of the FT’s Lex column, to not waste any time “nit-picking over the Fed’s language” and instead, “look at the bigger picture”. Read more
Or just more Fed easing. Or bubbles. Or even a buyers’ strike.
After Tuesday’s FOMC statement, yields did this — from short to long. Read more
Markets are set for a nervy few days as a week light on statistical releases will give traders plenty of time to chew on their fears of a double-dip recession, the FT says. Worsening data on the US economy, including weak non-farm payrolls, last week gave markets the jitters and sent risky assets plunging. The US Treasury yield curve, for instance, was at its flattest since May 2009, while investors sought safe haven refuge in currencies like the swiss franc. Chinese equities’ also experienced their biggest weekly drop for 16 months on growth fears. That gave the eurozone a few days respite from the bears’ focus, but Jean-Claude Trichet, ECB president, will nevertheless be in the spotlight at this month’s rate-setting meeting on Thursday. The Bank of England’s rate-setting meeting will also attract attention.
Sovereign debt yield curves are steepening.
On Thursday, US 30-year yields hit four-month highs after a government long-dated auction received poor demand and revived worries over the federal budget deficit. Read more
Excess reserves held by banks at the Federal Reserve are back on the rise, hitting their highest level last week since May 2009.
Kyle Bass of Hayman Advisors, who made money on the subprime crisis, now puts those reserves into pictorial context (H/T The Pragmatic Capitalist): Read more