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Wednesday, May 27, 2009

It Has Begun: Stocks Drop and Yields Rise Anyways

"The most commonly known example of an event horizon is defined around general relativity's description of a black hole, a celestial object so dense that no matter or radiation can escape its gravitational field. This is sometimes described as the boundary within which the black hole's escape velocity is greater than the speed of light." -Event Horizon

FN: It has begun. Today equities fell significantly and the "safe haven" bid was not large enough to overcome a deluge of selling. Yields rose. Again. This is not likely to be an isolated incident. This will happen with greater frequency and increasingly disruptive consequences.

We are rapidly approaching the point of no return. Once the event horizon has been reached, there will be no turning back.

Calculated Risk points out that mortgage rates have accelerated higher in Mortgage Rates: Moving Higher. Watch the "green shoots" of recovery wilt and die...

U.S. Stocks Retreat as Treasury Yields Climb, Monsanto Slides: "U.S. stocks tumbled as a jump in long-term borrowing costs spurred concern government attempts to reduce interest rates will fail and Monsanto Co.’s disappointing forecast triggered a drop in raw-material producers.

FN: The bond bubble has finally burst... and there is NO fixing this. Debt monetization (Interesting article by Daniel L. Thornton: Monetizing Debt.) does not work. An increase in debt monetization would be like pouring fuel on a raging fire.

The U.S. bond market is getting destroyed and that’s why we’ve rolled over,” said Peter Boockvar, equity strategist at Miller Tabak & Co. in New York. “It’s awful for the housing market; mortgage rates will get higher. It’s awful for anyone who needs to refinance in a highly leveraged economy -- higher interest rates are like kryptonite.

FN: I mentioned the steep yield curve yesterday in Bear Steepening of the Yield Curve. Today even the mouth breathing pump monkeys over at CNBC have started to twitch nervously.

Treasury Yield Curve Steepens to Record as Debt Sales Surge: "The difference in yields between Treasury two- and 10-year notes widened to a record on concern surging sales of U.S. debt will overwhelm the Federal Reserve’s efforts to keep borrowing costs low.

The so-called yield curve steepened to 2.75 percentage points, surpassing the previous record of 2.74 percentage points set on Aug. 13, 2003. Yields on 10-year notes have risen more than 100 basis points since Fed officials said in March they would buy up to $300 billion of U.S. debt over six months to drive consumer rates down and lift the economy from recession.

The markets are starting to grapple with the issue of what happens when the Fed exits and the Treasury needs to continue at the same pace,” said David Greenlaw, the chief financial economist in New York at Morgan Stanley, one of the 16 primary dealers that trade with the Fed and are required to bid at government bond auctions.

U.S. 10-year notes have lost 8.7 percent this year, according to Merrill Lynch & Co. indexes, while 30-year bonds have lost 25.5 percent. Two-year notes have gained 0.3 percent.

Investors are selling long-term Treasuries as the government borrows record amounts of debt to fund bank bailouts, stimulus spending and a record budget deficit. The U.S. will sell $3.25 trillion of Treasuries in the fiscal year ending Sept. 30, according to primary dealer Goldman Sachs Group Inc.

Balance Sheet

After selling $1.9 trillion of debt maturing in one-year or less in the fourth quarter, the Treasury is increasing sales of longer-maturity debt. Officials have boosted 10- and 30-year bond sales to monthly from eight and four times a year, respectively.

Investors are also shying away from longer-term debt as government officials inject cash into the financial system. Fed policy makers have expanded the central bank’s balance sheet to $2.2 trillion and pledged as much as $1.8 trillion in debt purchases, including $300 billion in Treasuries.

Inflation expectations have increased. Ten-year breakeven rates, the difference between yields on 10-year inflation- indexed bonds and nominal Treasuries of the same maturity, touched 1.9218 percent today, the widest the spread has been since Sept. 23."

FN: Things are orderly right now. They can't be for much longer. When the world starts dumping long term sovereign paper (not just US treasuries) governments the world over won't be able to finance themselves.

Mortgage-Bond Yields Jump, Jeopardizing Fed’s Housing Effort: "Yields on Fannie Mae and Freddie Mac mortgage bonds rose for a fourth day, after yesterday for the first time exceeding where they stood before the Federal Reserve announced it would expand purchases to drive down loan rates.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds climbed to 4.51 percent as of 2:17 p.m. in New York, the highest since Dec. 5 and up from 3.94 percent on May 20, data compiled by Bloomberg show.

The Fed, seeking to use lower home-loan rates to stem the housing slump and bolster consumers, said March 18 it would increase its planned purchases of so-called agency mortgage bonds by $750 billion, to as much as $1.25 trillion, and start buying government notes. Rising mortgage-bond yields, driven higher in part by climbing Treasury rates, means the Fed now “faces a challenge to its ability to sustain low mortgage rates,” according to Jeffrey Rosenberg at Bank of America Corp."


EconomicDisconnect said...

Gald to see you back at posting!

I featured your article from yesterday on the steepening yield curve on my blog and my article (hence yours) was on Seeking Alpha today. Long time reader.

michael said...

Do you now expect an orchestrated stock market rout to increase number of safe heaven buyers?

Happy to see you back!

Dave Narby said...

Great minds think alike...

Ben, dig on Karl Denniger:

Not sure how bad this is, but I suspect it is really bad to unimaginable.

Ben Bittrolff said...


Thanks for heads up. Great article BTW.

Ben Bittrolff said...


Sounds like something 'they' would do, no?

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