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"Fire" in the Bond Market - Fed Raising Rates and US Issuing Ultra Long Bonds
ZeroHedge
by Michael Carino, Greenwich Endeavors
6/13/2017
Excerpt:
The bond market is on fire and you are about to get burned!!! Bond yields are lower and interest spreads as tight or tighter than that of the bond market crisis of 2008. This will lead to a catastrophic financial
train wreck that can happen at any moment. Why do I feel like I’m the only one sounding the alarms? Where is the media to help warn and prepare the marketplace? Why are investors going along and playing in what seems to be a rigged and tragically destructive game? It reminds me of the story of a frog jumping into a boiling pot of water. Once the frog hits the hot water, it jumps right out. But the frogs that is in the pot when the water starts out cold slowly gets cooked. The Fed has excessively accommodated financial markets for almost a decade. This has been such a long, accommodative cycle, investors can’t tell how close they are to getting cooked.
Some of the world’s largest and most sophisticated investors who pride themselves on being some of the smartest individuals are taking some of the most expensive risks with the worst payoff profiles of all time. Obviously, most investors have short term memories. Longer-term government bonds typically trade above the level of inflation by 2-3%. That should put the long bond around 5-6%. However, when there is an asymmetric skew in the economic data, like there is today, where growth and inflation has a higher probability to surprise to the upside, the premium should be even higher. Longer-term US Treasuries now yield 2-2.8%. If the longest US Treasuries normalize, the market losses could be as high as 50%!
Over the last couple of weeks, long dated US Treasuries rallied 40 basis points. That may not seem like much, but this is days before the Fed is going to raise rates another 25 bps. What makes this move absurd is that the rally happened not when rates are normal, but still priced for a recession or a depression. When factoring this 25 bp hike in short term rates, that is a 65 bp compression in spreads – a huge move!
Why? Was there a natural disaster? Was there a financial catastrophe? Both of these might be justification for a 25 or 30 bp spread tightening. But 65 bps? 65 bps is over 20% of the US Treasury long
bond yield!
.................................................. ...........
View the complete article at:
http://www.zerohedge.com/news/2017-0...michael-carino
ZeroHedge
by Michael Carino, Greenwich Endeavors
6/13/2017
Excerpt:
The bond market is on fire and you are about to get burned!!! Bond yields are lower and interest spreads as tight or tighter than that of the bond market crisis of 2008. This will lead to a catastrophic financial
train wreck that can happen at any moment. Why do I feel like I’m the only one sounding the alarms? Where is the media to help warn and prepare the marketplace? Why are investors going along and playing in what seems to be a rigged and tragically destructive game? It reminds me of the story of a frog jumping into a boiling pot of water. Once the frog hits the hot water, it jumps right out. But the frogs that is in the pot when the water starts out cold slowly gets cooked. The Fed has excessively accommodated financial markets for almost a decade. This has been such a long, accommodative cycle, investors can’t tell how close they are to getting cooked.
Some of the world’s largest and most sophisticated investors who pride themselves on being some of the smartest individuals are taking some of the most expensive risks with the worst payoff profiles of all time. Obviously, most investors have short term memories. Longer-term government bonds typically trade above the level of inflation by 2-3%. That should put the long bond around 5-6%. However, when there is an asymmetric skew in the economic data, like there is today, where growth and inflation has a higher probability to surprise to the upside, the premium should be even higher. Longer-term US Treasuries now yield 2-2.8%. If the longest US Treasuries normalize, the market losses could be as high as 50%!
Over the last couple of weeks, long dated US Treasuries rallied 40 basis points. That may not seem like much, but this is days before the Fed is going to raise rates another 25 bps. What makes this move absurd is that the rally happened not when rates are normal, but still priced for a recession or a depression. When factoring this 25 bp hike in short term rates, that is a 65 bp compression in spreads – a huge move!
Why? Was there a natural disaster? Was there a financial catastrophe? Both of these might be justification for a 25 or 30 bp spread tightening. But 65 bps? 65 bps is over 20% of the US Treasury long
bond yield!
.................................................. ...........
View the complete article at:
http://www.zerohedge.com/news/2017-0...michael-carino