Notes From Underground: Bonds Talking Trash To the Central Banks

Last week the world’s bond markets experienced an assault propagated by the MISERABLE U.S. five-year Treasury note auction on Wednesday followed by a more dismal seven-year sale on Thursday. Also, the Australian and KIWI 10-year notes suffered massive bouts of volatility even as the RBA and RBNZ intervened with more QE to stem the rise on the long end. We at Notes From Underground have warned that the markets were attacking the FORWARD GUIDANCE motivations of the world’s monetary authorities by attacking the long end of the yield curve as the area of least resistance because central bank asset purchases around the world have been targeted at debt instruments of much shorter duration.

Prior to Wednesday’s five-year auction, the note had been stuck in a range of 45 to 60 basis points, a classic case of financial repression with PCE inflation measures at 1.75%. On Friday, the five-year yield reached 85 basis points leaving dealers and investors with substantial losses on inventory and purchases. The rapid rise in yields in the belly of the curve prompted a RALLY in the DOLLAR along with a violent selloff in many commodities as large losses in the fixed income market led to profit taking in other asset classes.

The question I continue to ask: Will the FED and other central banks allow the long end of the market to experience further yield rises potentially harming the continued hoped for robust global recovery?

The answer is not simple for we have NEVER been here before, where the LONG END of the YIELD CURVE is allowed to rise as the CENTRAL BANKS continue to advocate LOWER FOR LONGER. If the FED allows the long end to reign supreme will it curtail much of the froth in bond, equity and of course commodity markets? What will the break-point be for either the global markets or policy makers?


Every time the markets have been roiled by a dramatic rise in yields — think Bernanke Taper Tantrum and Powell Pivot — the policy makers CAVED, setting up the classic Minsky scenario where complacency increases the risk of financial instability. The FED and others tried to jawbone the market at the end of the week as the ECB proclaimed that any further rise in yields would potentially harm the European recovery. The FED remained sanguine about the rise in yields, proclaiming that it reflects the success of the U.S. central bank’s efforts to stimulate the economy creating the potential for robust job gains for those who have been most affected by the Covid shutdowns. The market gave the FED a reprieve in its assault by keeping pressure on the FIVE YEAR but purchased some 10- and 30-year debt, which flattened the curves.

There certainly is far more value in the 30- than the five-year but the point of least resistance for interest rate traders is the longer end. Will there be another attack on global long rates setting up an official statement about the necessity of YIELD CURVE CONTROL? There is precedent for what was termed the ACCORD. The battle is on as the market attacks the forward guidance policy of the world’s central banks. Lower for longer will be the RED LINE for Powell and his international cronies. The test of wills has begun.

On Thursday, the Four Horsemen of Global Macro chatted with Richard Bonugli of the Financial Repression Authority. The conversation was recorded just as the debt markets were suffering the paroxysms of a war unleashed upon the world’s central banks. Enjoy the episode as Richard Bonugli does a great job extracting reems of ideas.

Click here to listen to the episode.

As an aside, an important variable to watch is the U.S. dollar for a dramatic fall in commodity prices — which is doubtful — coupled with a steep fall in emerging market currencies would conjure concerns of a global slowdown perpetrated by the massive amounts of DOLLAR-DENOMINATED DEBTS sitting on the balance sheets of emerging market corporations and other private borrowers.

The FED may pretend to be Bartleby the Scrivener by choosing NOT TO RESPOND but the strength of BOND SELLERS may provide a force that does not allow for benign neglect.Many areas to be attentive to but most importantly follow the smoke trail of the DRAGON.


Tags: , , , , ,

74 Responses to “Notes From Underground: Bonds Talking Trash To the Central Banks”

  1. Mike Temple Says:


    Expect “open mouth” operations from the Fed as we approach Mar FOMC.

    Fed cannot raise short term rates NOW.
    Nor can they acknowledge that the action in Red EDs will undo their dot plots.

    Expect YCC as there really is no alternative.

    RBA leading the way here tonight.

  2. Financial Repression Authority Says:

    […] LINK HERE to the Blog Post […]

  3. Fred Geschwill Says:

    Just for those of us in the cheap seats. I assume that the nuts and bolts of YCC is the increased buying of 5year and longer bonds. Is this correct? Can they achieve it with currency manipulation. It would seem we are going to add 1.9 trillion in stimulus. You guys really provide a graduate course in Macro for a very small fee. Thankyou

    • Yra Says:

      Fred–i would suggest moving it out to the 10 -30 range in an effort of true financial repression–just a conjecture as again this is new territory for the monetary policy strategists and believe me unlike the Mars landing which was done with unbelievable accuracy the FED is not in any way practicing or engaging in Rocket Science

      • BT Says:

        Yra- sobering truth. The way i see it you have to position yourself for all scenarios and then react quickly once there is more clarity of how this goat rodeo will end. For me thats overallocation of longterm treasuries (no interest in corp debt at these levels), PM, value over growth, ex-us, predom asia. Loved the roundtable and agree with david rosenberg on much of the bad news already priced in LTT.

  4. BT Says:

    How sad is it of whats become of the most liquid bond market in the world. Macro aside, With the MOVE index continuing to rise, and all the convexity hedging going on, the bond market is turning into a YOLO momentum trade. The end of the day last Friday was quite the rip for longterm treasuries. Look at the volume of TLT the last two trading days. Bonds were supposed to be boring but not anymore. Bonds are now front and center of fintwit/reddit in the get rich quick plays. Smh

  5. Asherz Says:

    Will the Fed allow higher long yields? I maintain a resounding NO! With global debt (look at globe because all is interconnected) at $280 trillion, each percent is $2.8 trillion on a global GDP of $87 trillion. There isn’t room for shrinking national budgets . This requires YCC, more debt issuance, more monetizing of that debt, more real inflation (not the hedonic CPI variety) . In short, a death spiral.
    Is there a way out for the bankers? A Nobel Prize to anyone who can suggest one. We will see Mr. Bartleby Powell join Mr. Biden in the basement.

  6. Richard H Papp Says:

    On Friday in the late PM TLT got over enthusiastic and ended on its high area. This AM @ 7:30 AM EST TLT was down a full 2 pts. where as the June contact was up about a quarter of a pt. The key for the Fed should be the June low on Friday of 156.25 in Chicago.

    • BT Says:

      Luckily i was at my computer for last fridays close and sold my zeroes right before the close and bought the position back this AM. It went parabolic in those last 15m of trading. Today, similar but less extreme close. Super weird price action.

  7. Richard H Papp Says:

    If you go back to the low in price for the long bond in Chicago for March, 2020, it was in the 156 area. On Yra’s post of 7 Feb.,3 weeks ago, i discussed the 50% retracement area. Once that gave way, we had Thursday’s downward spike in price. So, it was not weird that current support was found in the 156 area.
    Let us see what happens from this level!

  8. Pierre Says:

    Okay, so, another book I have to read, “Bartleby the Scrivener”. I don’t mind Yra, but I am going to have to build bigger bookcase if this continues.
    “smoke trail of the DRAGON”, I’m going to guess this is the Chinese Yuan and the policies coming out of the PBOC. With interest rates at 3.85% and inflation at -0.30% seems like a good place to be for now.

    • Yra Says:

      Pierre—you have been a contributor for quite awhile and well versed in NOTES FROM UNDERGROUND—as we deal with DENG—-Practice is the sole criterion for judging truth—has been the guiding force since Deng but maybe XI is not a proponent—chew on that for a while

      • Pierre Says:

        Yra, you’re correct. This is going to take a little time to “chew” on. I appreciate the track you put me on, Deng vs Xi will keep me busy for little while.

    • David Richards Says:

      Me thinks the Chinese attended the BLS School of misreporting unemployment & inflation. To get 0% inflation, the Chinese must make lotsa product substitutions and technology adjustments, while excluding some stuff that apparently nobody needs like food.

      • Pierre Says:

        , “There are three kinds of lies: lies, damned lies, and statistics.”; =D

  9. BT Says:

    Bond vigalantes in full control now – Powell at this rate will be out of a job through “fault of his own.”

    Dollar getting flight to safety. Aside from the shortside, cash is king as there are few places to hide (value, energy have held up).

    Assuming no fed intervention and cont bond and eq selloffs, where to people think gold or treasuries finally catches a bid?

    • Michael Temple Says:


      Treasuries, and therefore gold, catch a bid AFTER Powell makes his move, likely in response to a stock mini crash and-or a “failed” bond auction.

      Until then, downside lurks for both, but I would be quick to take profits as I don’t think Powell can stomach chaos for too long.

  10. Recoba Bacci Says:

    Another possibility for Gold is that we rebound strongly from the current washout of weak hands back above $1750 and then settle into a trading range while the market awaits YCC.
    So basically, if you wait for YCC to be announced the market will make you pay up.
    Bond Bulls (deflationistas) licking their chops at these yields, i know a few already scaling in. Are they gonna get run over? Stay tuned…

    • Michael Temple Says:

      Gold mining stocks have stabilized while gold has drifted lower.
      Perhaps a sign that the bottom is nearing for gold.

      YCC will most assuredly boost gold’s fortunes. I will keep an eye out for how sharp the PM mining gains may be

      I wonder when Janet decides she needs to “set the record straight” since Jerome has been non-committal

      Did he NOT want to make a big policy hint at a WSJ event instead of a normally scheduled FOMC press announcement?

      Either way, sentiment in bonds and gold are at historic lows.


  11. Asherz Says:

    Announcing a Naming Contest

    In the 1970s the stagnant economy paired with galloping inflation. It was called STAGFLATION.
    With YCC almost assuredly coming ( if it hasn’t already started) because without it chaos will follow, and real inflation (not the CPI kind) will be rising uncontrollably, what can we call this state of affairs- low long yields, flying inflation, and outrageous real NEGATIVE YIELDS?
    The winner will be named by Yra as the Neologimist of the month.

    • Pierre Says:


    • Trader B Says:

      Do we each only get one entry?

      MAMU – Mother of All Melt Ups
      (I cannot take credit as this term is from Dr. Ed Yardeni)

      My own term would be:
      ZIRP Gone Wild

      Or maybe more appropriate, we can can just call this:
      The Last Dance

    • BT Says:

      Boomers last gift to future generations. I didn’t hear a thank you? Boomflation

    • David Richards Says:

      Ludwig von Mises called a severe episode of this a “crack-up boom”.

      Or maybe simply call it “POWflation”, named after the fed chair and also because after the initial crack-up boom, it’s really gonna hurt – POW.

  12. Michael Temple Says:


  13. Pierre Says:

    Does anyone else see the USD/HKD under pressure?
    Is this peg about to break.

    • Yra Says:

      Pierre–interesting for it was not long ago that they were worried about the USD/HKD being broken by an upward move in the DOLLAR

      • Yra Says:

        Pierre the Usd/HKD is not under pressure unless you mean the HK is weakening –fro the way you wrote it I sensed the US DOLLAR was under pressure which infers weakness

      • Pierre Says:

        Sorry about the confusion.Thanks for the clarification.

    • David Richards Says:

      There was a well-known American HF manager who publicly and aggressively predicted the break of this peg in 2019 and he heavily campaigned for investors to trade it. Yra’s repeated guest Louis Gave immediately called that out as nonsense for numerous fundamental economic reasons and Louis was ultimately proven correct. So, Louis is the man. What does he say about it now? IDK. But last month, the same American HF mgr said that Singapore will replace HK as Asia’s financial center, but Louis calls that out as nonsense too.

      The eccentric but often correct Martin Armstrong has long forecast that China will replace the US as the financial capital of the world around 2030, which I imagine will cement HK’s place as a financial center over Singapore, and probably cause the demise of the peg as an outdated legacy of former US financial hegemony.

      Indeed in my wee experience, this peg seems to be outdated as USD is gradually becoming just another FX thru the lens of life in Asia. USD is generally no longer accepted on the streets of Asia and HK. I can buy stuff in CNH online and pay directly via mobile now – no USD, no Swift. So what do I want dollars for anymore? What can I buy with dollars that I want? Nothing except for a US-based subscription. Almost everything I want is made in China or Asia, we buy it from one of a dozen of the competitive Asian online shopping portals (which combined dwarf Amazon by size plus offer better prices). I suspect that in Asia, many of us will eventually prefer to hold DCEP, and last month numerous Asian RCEP central banks (plus the UAE) began laying the groundwork for it to be directly used in cross-border transactions, seamlessly like DCEP’s growing use within China currently (of course this will take time to develop). But even if I wanna buy a ship full of oil, I can now pay for it in yuan like how China is buying crude from Russia, Saudi and Iran now. Because with their yuan, those countries can buy lots of stuff from China or Asian portals that they want.

      Finally, maintaining the peg when the dollar is weak is highly inflationary to (usually) booming HK, because the peg serves as a vehicle of importing US monetary policy into HK. Which is often inappropriate. For example, this year and last when China and HK were doing well, the highly stimulative US monetary policy has been inflationary and destructive in HK (see the housing market for eg). And OTOH in 2018-19, relatively tight US monetary policy during the trade war was inappropriately contractionary in HK.

      So bottom line, IMO the peg is becoming obsolete and its demise would be appropriate. So, it’s probably gonna happen sometime?

      • Pierre Says:

        David, thank you for the reply and taking the time to post.

      • Yra Says:

        David–thanks for the answer which is indepth and concise at an understandable level —I knew you were coming to the fore—-thanks as always,Yra

  14. BT Says:

    What’s strange to me is how disconnected the “trading” of interest rates is to the avg investor in the financial press. Clearly, Yra and many on the forum are expert traders and can be consistently make money timing these moves.

    For your avg investor who has an investment horizon (liability matching needs) past the avg duration of their bond fund, the chances of them timing the change of duration of your bonds is pretty low. I see many longterm investors reading the financial press and switching the duration of their funds lower with long time horizons.

    Case in point: if you were the worst market timer and bought a longterm treasury fund in jan 1st 2009 when 30y was yielding 2.5%. Today you would have yielded ~0.9% cagr over an intermediate fund (7-10yr), and 1.4% cagr if you bought zeroes. This is despite the yield going nowhere in 12 years and taking an initial 35%+ drawdown. And it would be even better if you had contributions along the way.

    I just wish there was better education on reinvestment risks vs duration risks for those with longer time horizons.

  15. Asherz Says:

    Naming Contest

    All excellent and creative names. The judges are having a hard time deciding the winner but they all agree that Yra has attracted some very bright people to his blog.
    Congratulations to all !

  16. The Bigman Says:

    Yra Enjoyed your last podcast on Whitewater trader. Looks like battle lines are being drawn right at 3842 as noted on the podcast.( Nobody’s right if everybody’s wrong) One question and one comment:
    In the podcast I think it was Angelo who mentioned the spoo/bond with the ominous warning of AMF. How do you calculate this indicator? Which futures contracts do you use? Would the SPY/TLT be a good approximation?
    Comment Torn between the Hunt/Rosenberg and the Harris/Boockvar camps but what if both are correct. H/R no growth and H/B inflation= stagflation the rise of oil prices gives me flashbacks to the 70s when my first mortgage was 12.5%(4% today would be similar- a doubling of the current rate). Then aren’t real assets the only hiding place? FWIW. TBM

  17. Pierre Says:

    Update on Deng versus Xi = more open markets vs more state controlled markets.
    Am I even close?

    “Markets will continue to fluctuate” J.P. Morgan.
    Not sure what made me think of that quote.

    • David Richards Says:

      Hi Pierre. I think it’s more nuanced than that. Actually, although the state recently became more involved in some aspects, I think that China is more open today than at anytime in our lives and is becoming more open, as seems as inevitable as the internationalization of the yuan, which should go hand in hand. It takes time though.

      For some great insight into the Deng and Xi eras, I’d recommend Dalio’s descriptions in his free online book from this point (it’s long):

      Actually, that whole chapter provides an excellent historical and financial perspective from someone with the benefit of having lived and worked in China for years along with his family (his son stayed on afterwards), who both compliments and criticizes China as he sees fit, fairly objectively as at the end of the day he primarily seeks to earn investment profits. Don’t we all. If you’re able to get through that chapter (it’s lengthy), I think you’ll have more understanding than most into China and the China-US relationship, the most important one in the world today.

      • Pierre Says:

        David, thank you. I will go through the chapter as you suggested. This whole topic is fascinating to me..
        I hesitate to ask because you’ve been so generous with your time and shared insight. What are your views on India? Even though India’s GDP is significantly less than China, both countries have just about the same population.
        I keep thinking that India has got to be some kind of wildcard in this game.
        Thanks again!

      • David Richards Says:

        Oh you’re welcome. I know little about India except everyone I know here of Indian descent says Modi stole his re-election and they say India is bureaucratic and very corrupt with little potential, which is why they’re here instead. But consider how Ray Dalio wrote in that book, people he met when he first worked in China long ago didn’t believe him, for similar reasons, that the old hutongs in China would be replaced with gleaming new skyscrapers, yet it happened. So these Indians may similarly underestimate their potential. My wee take on India is it’s an interesting place to visit but I wouldn’t wanna live there.

        Don’t overlook ASEAN, where I’m retired like Jimmy Rogers “for my children”. ASEAN has half the population of India but has a 20% larger economy, which has grown faster over the past decade and is now 42% the size of the US economy PPP. What Raoul Pal calls “the rising monsoon empire”. Both ASEAN and India are EM and suffer large income equality, but ASEAN is generally more developed, wealthy, diverse and dynamic with perhaps more potential. That’s in part due to the new RCEP economic partnership beginning January 2021, comprising all of ASEAN and East Asia, accounting for one-third of the world’s total economy and population (but significantly, RCEP excludes Taiwan and India, tho Taiwan wants a seat because three-quarters of Taiwan’s economy depends on East Asia incl almost half on China+HK). RECP is possibly to ASEAN what NAFTA was to Mexico, but even larger. Interestingly I think, RCEP probably wouldn’t exist if Trump hadn’t ended TPP negotiations 4+ years ago (Hillary promised to do the same so the 2016 election made no difference in that respect). IMO that was a strategic error and an unintended gift to China.

        So changing up, I hesitate to ask you because it’s OT and possibly a loaded question, but what do you think about getting the jab? I read that a significant portion of US healthcare workers declined it. Don’t worry that your response will sway me because I don’t think one can rely on medical opinion over the internet sight unseen, plus I’ve already mostly decided. IMO the worst thing about covid from the start seems to have been gov’t reactions to it and my biggest worry is what governments will do next, especially here in East Asia where they’re quite repressive. It’s a problem.

      • Pierre Says:

        Hi David,
        Thank you so much for all you share. I appreciate your opinion on the ASEAN countries, my s/o is from Manila and I will probably find myself there when I retire.

        As far as the vaccine, I have so far declined it. A little background on me. I work at a major hospital on the east coast of Florida. I am in Physical Therapy and I work on the COVID floor at least once a week. (since the onset). I have seen the whole spectrum,from people who test positive and have no symptoms to people laying in ICU in supine struggling for every breath. Some patients present with increased heart rates and no problem breathing some vice versa. A lot present with weakness in legs unable to stand.Some stand right up. Very strange to me.
        My point? it’s nothing you want to get a bad case of.
        From my perspective, it’s the comorbidities that make it worse or even deadly. People who are obese,diabetic, smokers, have heart disease,elderly etc.. that are most at risk. Also nursing home residents that live in close proximity to each other.
        If any of the above was me I would get the vaccine.

        For now I personally want to take a wait and see approach. I hear talk of yearly booster shots, yearly second vaccines. Is this going to be like the flu shot? Too many questions. I am not afraid of it anymore. I know for a fact I have been exposed multiple times, With no protective gear on.

        What the mainstream media does not talk about is strengthening our own immune system. I’m not preaching, but sharing. I have cut the sugars almost completely out of my life, I eat whole foods and get plenty of rest, (read low stress). Wash my hands, I DO NOT TOUCH MY FACE WITH MY HANDS, I stay away from people who are coughing and wear a mask when I’m in a store.

        I believe this thing is going to be with us a long time and we will all eventually have to fight it by our own immune system. IMO this is our best chance.

        I hope this helps share the some light, I see a lot of suffering that need not be. If we somehow went back to eating real foods.

      • David Richards Says:

        Hi Pierre. Thank you so much for your thoughtful reply. I shared it with my own longtime s/o here in Asia and also retired (like the future you envision, hah) and we both greatly appreciated you sharing your experience and opinion. We thought it was excellent.

        IMO everyone should read your words of wisdom, which have more value than anything I’ve ever written. It also reinforced to me the importance of doing right by your immune system, about which I tend to lose focus, so my spouse said, “See?!!”

        BTW, I think you’ll love SE Asia as you should live better for less and live healthier by eating more real food, being active outside year-round and enjoy less stress (“chill, la!”). Plus I enjoy zero tax on all my investment income/gains and I needn’t even track/report them (I think offhand the Philippines is similar with a “territorial” tax system). I never expected to stay here but like other angmoh, after a while I found I preferred it here to home. Yra’s previous guest Marc Faber, originally from Switzerland and the Swiss National Ski Team (now lives in Thailand and previously HK), comes to mind for example. Now, this is “home”.

      • Pierre Says:

        Hi David,
        I have learned so much from this blog and it’s followers that I’m happy to share what I can from my experiences.
        Your wife’s comments made me smile. Lol

      • David Richards Says:

        Yeah, so she denies me beer and ice cream (life essentials on a tropical island) because of the sugar, carbs and my slightly excess weight – very overweight compared to most thin Asians, as altho my clothes are US size Medium, that’s XXL here, honest lol. “What you need sweets for, my cooking isn’t enough for you? Look at your tummy, I think it’s enough.” Yet if you research online, you’ll see that HK (where we used to be) enjoys the world’s longest life expectancy, followed by Japan and others here. Little sugar consumed here and there has been relatively little covid too.

    • Yra Says:

      Pierre—it doesn’t take a physical therapist to know which way the muscles are flexed

    • Yra Says:

      Pierre I was referring to your Deng versus Xi

  18. ARTHUR Says:

    The Great Demographic Reversal:
    Ageing Societies, Waning Inequality, and an Inflation Revival

    • David Richards Says:

      The demographics of developed Asia and China look terrible for their future growth and economics, which in the case of China has been much exacerbated by their terrible one-child policy (now cancelled). Makes me wonder how anyone can seriously consider them to be a threat to rule the world or destroy their way of life, given their coming age spike and then population collapse. I’m not buying that but I might (I said “might”) buy their bonds again for the fixed income segment of a portfolio.

  19. BT Says:

    Did I miss the memo? I am in the wrong profession. NFT’s fetching 69 million 3 weeks after it was made. New topshots NFT millionaires on wsj. Everyone has a SPAC. GME going back over 300 after going back down to 40. Tsla going up 20% in one day. BTC going parabolic for past year. Yes, this dance can keep going on until it stops but what other signs are people waiting for? This seems worse than dotcom but somehow i have the feeling that we are only in the 7th inning of this madness. I will not complain watching my investments moon but this is getting ridiculous. CB’s must feel really proud of themselves.

    • Mike Temple Says:

      Excellent summation.

      Either gold goes to zero, or some serious mean reversion later this year.

      Until this fever breaks, however, no speculative juice for gold.

      In fact, it is laughable that the “powers that be” hammer gold but have no problem with all the high fliers you cite.

      I think this outdoes the mania of the 1920s.

      No price too high to pay for anything

      To Infinity and Beyond

      • BT Says:

        On twitter, Peter Schiff says his son sold all his PM, and his portfolio is 100% BTC!

      • David Richards Says:

        A capitulation?

      • Asherz Says:

        How many on this blog remember the Odd Lot Theory, signal? Not many I venture. AU—-BTC

      • BT Says:

        Retail investors buy odd lot of shares and since they are often wrong, its a retail sentiment indicator. That one?

        Btw, how ironic will it be that the stimulus (with 50% going into yolo risk products if that can be believed) is what brings this whole thing down.

  20. Asherz Says:

    Right BT. The small investor was a contra-indicator and it worked for a long time.

  21. BT Says:

    I predict yra’s NOTES has the best indicator. Last time we had this many posts in a thread was mar 26th 2020, which was near the bottom of the eq markets. Maybe this marks the top?

    • Michael Temple Says:

      Highly doubt we are at the top just yet

      Just wait to see how how high “everything” goes when YCC begins.

      We ain’t seen nuthin yet.

      To Infinity and Beyond as NFTs have shown us

      • David Richards Says:

        According to an interview with MOVE index creator Harley Bassman and HF Strategist Mike Green, seen in realvision last week and reported in ZH along with full transcript, there will be no Fed YCC. Worthwhile to read their reasoning as they’re two smart guys with a good argument.

        But IMO it’s moot with the Fed expanding at $180B last month, which works out to $9.5-billion per business day in February. Far more than their forward guidance mere weeks earlier. Can you say “Weimar” or “Project Zimbabwe”? Also reference Venezuala, where equities sky-rocketed, at least in local currency terms, when Venezuala did before what the US is doing now. Let’s watch and see.

      • Michael Temple Says:

        Harley Bassman is a bond market legend.
        But, he fails to account for what happens to stocks if bonds collapse to 3/4/5% yields.

        Hard to imagine Janet (and Biden) allowing Jerome to let stocks implode and undo all the “good” of their mega stimulus by refraining from YCC.

        As you highlight, watch what they do, not what they say. Fed buying is already higher than its stated levels.

        Furthermore, there is nothing transitory about the coming wave of YOY CPI comps.

        Clearly, the mass vaccinations have begun to change psyches as folks begin living life again, even if we don’t reach pre Pandemic levels.

        TSA reported largest number of air travelers on Friday in the past year. Airbnb reporting pick up in bookings

        YOY. Oil now $65 after plummeting below zero one year ago.

        Beginning in May when we see April data released, I think CPI can be bubbling over 3% easily

        Steel and lumber and copper all have moonshot moves compared to one year ago…

        Hard to see how the natural equilibrium for UST 10 year yields isn’t CPI + “something”

        If CPI is about to run “hot” at 3%, who doesn’t think 10 Yr yields should rise to at least 2%, no matter how “transitory” commodity inflation is supposed to be.

        In the famous words of Richard Pryor, who are you going to believe…..Me or your lying eyes?

      • David Richards Says:

        Michael, those are all good points to me and AYK you’re preaching to the converted. But I thought they raised some interesting points and the source is impeccable as you say.

        Anyway, given what policymakers are already doing, no matter what they say, the end effect seems to be a foregone conclusion to us. The Fed might never proclaim it’s engaged in YCC policy. Just as Powell earlier publicly denied that his QE was QE (in his words, “Not QE”, lol). And like how their debt monetization technically isn’t “debt monetization” because they legally skirt it by using the banks as a stepping stone (for a big easy bankers’ fee) to indirect debt monetization instead of direct debt monetization.

        The whole shitshow is a charade and it’s getting worse.

        But as the apologists say, what would you have them do in the alternative? Nothing, and let the country collapse into its worst depression ever? They’re in an awful position with no good choices.

        AYK, their chosen path will make the dollar take the brunt of it. The medium and long term consequences of it should be devastating.

    • David Richards Says:

      Interesting. But US equity averages haven’t topped as the Dow and S&P just made a technical breakout above key horizontal resistance with their new all time highs on the daily and weekly charts. Not my opinion, just a fact.

      Dow also broke out from an ending diagonal on Friday, which should have limited its advance if a top had formed. But diagonals, trend line and moving averages etc are subjective TA levels, whereas historical horizontal support/resistance like above are objective TA levels – like ones that Yra often cites in his articles here. And I don’t argue with key historic horizontal levels, because those get widely watched and affect market psychology… So, Dow and S&P higher.

      OTOH, some other equity markets like the Chinese averages (where policymakers aren’t cooking with gas like in the US) do look like they’re topping for at least the short-intermediate term. At least in terms of local currency, tho not necessarily in terms of USD which I still expect to ultimately collapse, subject to the occasional upward correction.

  22. Asherz Says:

    No way to avoid YCC unless you cut social security, Medicare, defense and education. That’s not happening. Budgets are too tight to allow yields to begin to find price discovery.

    • David Richards Says:

      Shh… you may shatter the Fed’s CONfidence game. And big tech could determine you’re violating community rules. As they only allow warm fuzzies. Others can be censored and banned.

    • BT Says:

      Lot of moving parts for sure. My question is how could US longterm rates get to 3-5% when a lot of the world has NIRP. Wouldn’t foreigners be jumping at our debt, currency hedged, vs their other fixed income options in their local countries?

      • David Richards Says:

        Well, UST yields were over 3% across the curve for 5 years & longer just 2.5 years ago, when most of the [western] world had zirp/nirp. And you’re right, some foreigners jumped at it, which IMO was a good thing as it supported dollar strength and the standard of living of average working Americans, while on the other hand zirp/nirp undermines our living standards, leads to capital misallocation and facilitates financial fraud which I expect lurks out there right now – stay tuned.

        But today, as Asherz wrote, US budgets are too tight to permit UST price discovery. Yet while the West is all zirp/nirp, much of the world is not, as for example 5-yr govt bonds in China, India, Russia, Indonesia, Brazil yield 3-6%, which is a big chunk of the world, being the 1st, 3rd, 6th, 7th, 8th largest real economies today (GDP PPP). This presents a value proposition.

        Further, treasuries are no longer seemingly an anti-fragile asset. Because treasuries sold-off with equities a year ago and also in the smaller market swoon about a year earlier. Instead, the market record suggests that select Emerging Asia govt bonds are replacing treasuries as the anti-fragile financial asset. Perhaps gold may eventually reassert itself as an anti-fragile asset too, but that’s conjecture as gold has fallen during recent equity market routs like treasuries have. The world is changing and as history has shown, the anti-fragile assets of choice change with it.

        I also include Russia in ” Emerging Asia” with potential, tho not close to anti-fragile yet as say China. Russia has a strong balance sheet, it’s heavily exposed to commodities (read real assets that benefit from reflation, especially energy), it has low debt, is militarily secure, is well-positioned to supply Eurasia which accounts for most of the global economy, has already de-dollarized, and owns lots of gold reserves instead of treasury reserves. Russia’s main downside is its poor demographics. Its 10-yr yields 7% and the worst of RUB’s depreciation appears over, it might even rise as a commodity currency.

  23. Yra Says:

    TO ALL—very moving conversation .I have been packing up 37 years of living in the same domain and it is time to move on–sold the house but now catching up as the moving truck left for scottsdale yesterday.For an addition to these posts—Powell was pathetic at the press conference today–Steve Liesman had the temerity to ask the most relevant question in three parts and as Peter Boockvar wrote in his notes—-Powell read a prepared answered that Leonard Cohen would have noted danced me to the end of time.Several months ago I advised Powell to resign with grace by allowing Biden to pick his own Fed Chair and it may well have been him but any NOTES FROM UNDERGROUND reader would win a cocktail bet by suggesting Lael Brainard–the more he talks the more sure I am that Powell is in way over his head –resigning would have been a great act of Social Justice—it was pathetic today –also dodged SLR question probably as he fears Senators Warren and Brown—thanks for all the great comments added to this blog—back in the saddle again

    • BT Says:

      Congratulations on the move and you picked a great place to live!

      Powell doesn’t say anything again! Maybe he ran out of ideas? It’s funny people still expect him to say anything of substance. We all know how this will end, something will break that he didn’t forsee and he will be reactive without “ample notice”.

  24. The Bigman Says:

    Help! Can someone please explain this SLR issue to me in layman terms? Sounds like, if the exemption expires, the banks will need to raise more capital. If so won’t they need to buy UST which would lower the yields? I’ve been told one should only invest in those things that one understands. That advice leaves me very few options now. Help!

    • Michael Temple Says:

      With the exemption of the SLR, banks were NOT charged any capital haircuts for holding USTs (mostly T Bills). So, even with a paltry yield of 5-10 bps, the return on capital was infinite.

      If now the SLR exemption is repealed, banks will face a capital haircut on their T bill holdings. On the margin, they probably do NOT continue to hold as many bills going forward…

      To entice new buyers, FED announced it will increase RRP counter party limits from $30 to $80 BN

      So, Fed is effectively doing “vendor financing” on an even bigger scale, all without actually increasing QE, but effectively “capping” yields in the front end (YCC-lite)

      Did nothing to address the Sturm und drang of the 10/30 year bonds.

      As such, the selling resumed within 16 hours of Fed’s announcement

      While market commentators cooed at Powell’s divishness, Mr Market TIGHTENED conditions by 10 BP as real interest rate on UST 10 yr SOARED 10 BP overnight from NEG 67 to NEG 57 BP.

      Jerome was hoping it would go to NEG 77.
      Makes USD stronger, which is NOT what markets need/want

  25. The Bigman Says:

    Thanks Mike I think I get it now. With expiration of the SLR exemption, banks no longer have any incentive to hold treasuries, in fact have a disincentive. So the banks will dump them driving the rates up and bond values down. Is it just me or do others think that the Fed has lost control?

    • David Richards Says:

      > “do others think that the Fed has lost control?”

      No. To quote Powell from a few years ago, “They have a printing press”. Which to them is unconstrained, because he also says there’s no inflation, and when there is inflation, it’s desirable, and if there’s high inflation, it’s merely transitory.

    • David Richards Says:

      Is it just me do others think it’s a foregone conclusion the SLR will be extended? I believe the whole charade is extend and pretend. And as someone wrote above, we all know how this will end.

    • Asherz Says:

      All they lost was their rudder. The ship can sail in only one direction, powered by their printing press. If they try changing course they’ll run aground. There is only one way this can end. We know what that is.

Leave a Reply

%d bloggers like this: