Treasuries rallied last week mostly on the back of the sell-off in equities as well as the Fed’s seeming backpedaling on the timing of rate hikes.
The five-year treasury yield hit a multi-year high relative to the average of the two- and the ten-year rates (the 5-year treasury is cheap on a relative basis). The chart below shows a measure of how “concave” the treasury curve has been over time (ne…
Treasuries once again experienced what amounts to a sharp curve flattening in recent days. The market action resembled what took place after the initial announcement of taper back in December (see post). The yields in the “belly” of the curve have risen sharply as the market prepares for rate “normalization”.
The chart below compares the performance of long-term treasuries (TLO) to emerging market bonds (EMB) over the past year.
As the Fed cuts its buying program, we are left with two major categories of purchasers – foreign and private domestic.
Directional investors/traders remain heavily short or under-invested in the bond market. For example the CFTC commitment of traders shows speculative investors, particularly the smaller ones, being quite short the 10y note futures.Source: Barchart (tho…
Today’s payrolls shocker (see story) sent treasury yields sharply lower. As discussed last month (see post), speculative investors have piled into the market and were forced to cover their shorts after the jobs report. Going forward, until there is more visibility on the labor markets, investors will be more cautious shorting treasuries.
When it comes to treasuries, there is no shortage of bearish news. The budget deal is done, the third quarter GDP was better than expected (inventory build issue aside), and the US labor markets are supposedly getting better. Expectations of an “e…
Our deficit hysterians love to raise the specter of China. Supposedly Uncle Sam is at the mercy of the Chinese, who have a stranglehold on the supply of dollars necessary to keep the US government above water. If the Chinese suddenly decided to stop lending those scare dollars, Uncle Sam would be forced to default.
The Gallop sentiment index is now at the lowest level since 2011, when doubts about Italy’s ability to roll its debt posed risks to EMU’s stability. It took the first 3-year LTRO program to bring some calm to the markets and to consumer sentiment. Now, in a matter of days we are back to those lows again.
This is a serious blow to the US economy, with the full damage becoming visible in months to come. While there isn’t much that can be done about the shutdown without some sort of a deal, academics have been desperately searching for a solution to what amounts to a constitutional crisis – the debt ceiling impasse. One such proposal came from Columbia University (Neil Buchanan and Michael Dorf).
The authors argue that the executive branch is presented with two competing directives. The Obama administration is required to spend money on programs appropriated by Congress (including paying on government debt, paying for Social Security, Medicare, etc.). At the same time the president is not allowed to issue incremental debt. Complying with both is an impossibility, forcing the president to violate the constitution one way or another. The two Columbia law professors argue that in such a situation the president should choose the “least unconstitutional” path. And that would be issuing additional debt without the approval from Congress (see paper below).
The problem with this solution is the market. Selling “unconstitutional” treasuries will encourage traders to short these bonds against older (constitutional) vintages. Inevitably someone will challenge the paper’s constitutionality – potentially all the way to the Supreme Court. In the mean time yields on such paper may end up being quite high. Ultimately it will push up rates across the board as more of these bonds hit the market. Such a scenario could make the Fed’s “taper” feel like child’s play. The authors call these bonds “radioactive” and admit this solution could be problematic. Nevertheless they argue it is better than an outright default and could potentially pacify the markets.
It took the 3-year LTRO to calm global markets in 2011. Now we talking about “radioactive” bonds to help us do the same in 2013?
Columbia Law Review
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