Bonds - US10Y Cannot and Will Not Rise Significantly
Updated
Idea for 10Y Treasury Bond Yields:
I speculate that yields cannot and will not rise significantly until the equity bubble pops.
I think that it will start a wave reaching 0.7 this month.
Why is that?
- There is almost $300 trillion in private sector debt globally.
- Companies used margin debt for share buybacks to boost EPS, creating the illusion of economic growth.
- There is a borrowing cost for private debtors, debt must be serviced.
- 10Y is used as a risk-free rate benchmark for credit derivatives, especially for risk spreads.
- Furthermore, rising yields means that a rate hike would inevitably follow.
- The premium on credit risk is at a record low (BBB).
- Even junk bonds and Greece is negatively yielding.
- Zombie companies are at an ATH (one that isn’t generating enough income to cover the annual interest payments on its debts. With interest rates so low, these zombies have stayed “alive” by refinancing their debts at increasingly lower rates, or simply tacking on more debt to keep breathing. But with rates rising, zombies may be forced to refinance at higher rates.)
- Since debt is increasing, the magnitude that rates can rise before negatively impacting the private sector is decreasing.
Any significant rise in rates will quickly cause mass insolvencies in these zombie companies, which also would cause a cascade of liquidations in yield chasers who had sold credit default swaps - accumulating asymmetric risk. It is a massive, massive bubble, and any significant rise in rates would collapse the equity market and the economy.
The only way to keep equities stable would be for negative rates, but the dollar is without a doubt - rising. As debt rises, liquidity is sucked out of the collateral pool in a proportional amount. You will just eventually get to a point where debt servicing becomes too expensive anyway from a collateral supply perspective. That's the fundamental condition which will eventually bring about the reflexive regression to the mean.
So is it a slow and painful death, or a quick flush?
I'd bet on the latter... more money to be made for insiders who short it.
In fact, I would wager that the Bill Ackmans of the world are betting big on credit default swaps on zombie companies, similar to CDSs/CDOs on subprime mortgages in 2008. People are buying with both hands bonds which are expected to yield less than what they paid for at the maturity. Any change in conditions would cause this to be capitulation into a bid-less market, don't you think? It's pure insanity and there is only one thing to do here.
GLHF
- DPT
I speculate that yields cannot and will not rise significantly until the equity bubble pops.
I think that it will start a wave reaching 0.7 this month.
Why is that?
- There is almost $300 trillion in private sector debt globally.
- Companies used margin debt for share buybacks to boost EPS, creating the illusion of economic growth.
- There is a borrowing cost for private debtors, debt must be serviced.
- 10Y is used as a risk-free rate benchmark for credit derivatives, especially for risk spreads.
- Furthermore, rising yields means that a rate hike would inevitably follow.
- The premium on credit risk is at a record low (BBB).
- Even junk bonds and Greece is negatively yielding.
- Zombie companies are at an ATH (one that isn’t generating enough income to cover the annual interest payments on its debts. With interest rates so low, these zombies have stayed “alive” by refinancing their debts at increasingly lower rates, or simply tacking on more debt to keep breathing. But with rates rising, zombies may be forced to refinance at higher rates.)
- Since debt is increasing, the magnitude that rates can rise before negatively impacting the private sector is decreasing.
Any significant rise in rates will quickly cause mass insolvencies in these zombie companies, which also would cause a cascade of liquidations in yield chasers who had sold credit default swaps - accumulating asymmetric risk. It is a massive, massive bubble, and any significant rise in rates would collapse the equity market and the economy.
The only way to keep equities stable would be for negative rates, but the dollar is without a doubt - rising. As debt rises, liquidity is sucked out of the collateral pool in a proportional amount. You will just eventually get to a point where debt servicing becomes too expensive anyway from a collateral supply perspective. That's the fundamental condition which will eventually bring about the reflexive regression to the mean.
So is it a slow and painful death, or a quick flush?
I'd bet on the latter... more money to be made for insiders who short it.
In fact, I would wager that the Bill Ackmans of the world are betting big on credit default swaps on zombie companies, similar to CDSs/CDOs on subprime mortgages in 2008. People are buying with both hands bonds which are expected to yield less than what they paid for at the maturity. Any change in conditions would cause this to be capitulation into a bid-less market, don't you think? It's pure insanity and there is only one thing to do here.
GLHF
- DPT
Trade active
Here we go... Interest rate volatility (SRVIX) 40% move.USD interest rate swap market telling a monetary policy change coming. These coincide with big market reversals:
Trade active
Correction, it is interest rate swap volatility, but it does indeed signal tightening of credit.Trade active
Watch for this, according to oxford economics, Treasury's debt limit should be reached by end of September, with no debt limit lift:oxfordeconomics.com/my-oxford/publications/642798
Trade active
RRP usage continues to climb. Zoltan had explained that in a few weeks, financial institutions may find themselves with too few reserves, leading to a 2019-style repo crisis.There was a large eurodollar (LIBOR) bet today that caused bullish price action, but which strikes if 2025 expectations drop (from 1.4% currently expected to below 0.5% on 3m rates). This is a bearish bet on inflationary expectations for the long term.
In conjunction with the SRVIX move, it does seems likely that there will be Fed policy error.
Fed will taper into slowing economy in order to crash the equity bubble and continue QE.
If it quacks like a duck...
There will be Japanification of the US economy.
Trade active
Couple of things:USD Inflation Swap Forward 5Y5 has hit the Fed's target for tapering:
US03M and US01M yields pricing in a credit default within the debt ceiling window:
Fed policy error signaled and getting priced in.
Trade active
M2 YoY % change has rolled over. This is a more relevant measure of liquidity than M2 stock, as reserves do not enter the economy but there is inflationary credit created based off of it.In order to have inflation and assets bid up, credit and M2 YoY % must be increasing, which is not the case.
fred.stlouisfed.org/graph/?graph_id=248494
The Fed balance sheet is a small small drop in the pool of global liquidity, and while tapering would be a nice headline, it's not necessary for the bubble to pop.
Trade active
Some thoughts:Bitfinex Securities announced today, basically you can just buy stocks directly with crypto now. Tether is printed for free by exchanges.
Bitcoin and Tether - The bottom line is that tether is not so different from subprime mortgage MBS's or CDOs of 08. They are just a new financial instrument marketed to retail to dump infinite margin risk on them. Implosion is inevitable in a credit/collateral crunch.
While I don't fully understand the plumbing of systemic liquidity, and I am not entirely sure if this scenario applies now, but I cant help but think it rhymes:
The proximate cause of the 2008 liquidity crisis was the differentiation of C2 collateral from C1 collateral. The major central banks and treasuries responded to the crisis by both increasing the monetary base and swapping superior for inferior collateral. This led to an exponential rise and subsequent crash in the ratio of total US financial sector liabilities to what we refer to as “ultimate liquidity”.
The nonfinancial sector has gone from holding bank liabilities to holding a diversified portfolio of securitized assets directly. While not backed by D, they were backed by C. As long as there is confidence in the assets comprising C, or as long as C1 remains a significant share of C, it may be assumed that these claims are "liquid", i.e., they can be converted into central bank money at fairly short notice.
This would appear to be happening now with the CB balance sheets effectively interfering with stock markets, and direct bond purchases.
So what happens in that economy when suddenly there are doubts about the underlying value of Exxon shares and other securitized revenue streams? Naturally they lose their attractiveness as investments and as liquid assets that are used as money. Suddenly there is deemed to be a liquidity shortage and this intensifies when it is clear just to what extent the value of pseudo liquid assets in the economy has expanded in relation to central bank money. Other collateral or money may continue to be acceptable, such as U.S. Treasuries, Bunds etc.
So there is a sudden split between cash and certain types of collateral, and everything else.
Everything else ceases to be liquid.
imf.org/external/pubs/ft/wp/2012/wp1295.pdf
Evergrande is rumored to be a non-trivial backer of tether. They are in the process of imploding. We will see how that plays out. I can't see how tether ends happily.
The global credit crunch is confirmed to have already begun, with global credit impulse collapsing. Foreigners and institutions should seek USD + UST as higher quality collateral.
China also does not have a floating currency rate, but it is pegged to the USD, and managed through their purchase of the USD. This is really the deflationary force which will take supply of collateral and drive the dollar higher.
With China beginning monetary easing, it should correlate to a lower CNYUSD, with yuan being sold and dollar being bought, further sending the dollar up and removing supply.
Thinking back on GPIF slashing US Treasurys, the rising yields of foreign institutions had fooled US investors into believing their economy was booming and reflation was accelerating.
With foreigners selling US debt, I don't foresee the Fed being able to stop Treasury purchases any time soon.
The asset bubble will inevitably burst with the dollar rising, and it will be such that bond purchases can continue. US economy can't handle rising yields. There will be a sudden rush for dollars and high quality collateral, for which there is no supply because of the leverage of liabilities on the dollar.
Note
Real yields on EU junk bonds go negative for the first time ever:ft.com/content/9110c6a8-69f6-4cc0-9ec5-bad5daeacfb7
So investors are betting that risk is now extinct and vanquished. Just gone!
You would buy at these prices if you thought there would never be a default again nor would yields ever go positive again.
Businesses are not allowed to fail right now, due to central bank interference, so it is likely that money managers are just shoving people's money on any yield that they can find, damn the consequences - they will just get bailed out anyway, right? As a manager, you can't afford to miss a quarter because you are bearish, and if it crashes, everyone loses so you are not in a worse position than anyone else. There's no plan. It's just FOMO and go until the end on an all-encompassing scale.
Just imagine what an Evergrande situation would do...
Related publications
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.