Interest rates have jumped up today. The yield curve is now very uninverted. My opinion is this will decrease the likelyhood of a fed rate increase. Interest will go up without the feds help.
If this doesn't stop soon, housing is going to be much worse going forward than I think anyone could have imagined a year ago.
Reuters today
(quote)
Traders said selling from mortgage investors hedging against the rapid uptick in rates lent additional momentum to the market's hefty decline.
"We are being overwhelmed by mortgage-related selling," said Thomas di Galoma, head of Treasury trading at Jefferies & Co. in New York.
June 7 (Bloomberg) -- Sales at Macy's Inc., J.C. Penney Co. and other U.S. retailers fell in May as shoppers curbed purchases due to higher gasoline prices and a sluggish housing market.
I just checked and the ten yr yield is up 12 basis points. Holy S***. There must be a lot of debt dumping going on. This could lead to a debt selling panic.
Keep an eye on the HB's and financial stocks as well as the 10-year bond. The home builders are way down this morning (recovering a little) and if this continues, banks and other financials will continue to go down. Tomorrow I will be looking at Jim Stack's index of residential RE stocks. It has been sitting on long term resistance (from last summer).
Stack's index will proabably be updated tomorrow and his main graph does not require a sign in, at Investech.com
These rising rates could be fatal to the housing market and ultimately the consumer.
And I see the recent pickup in business activity as outpacing consumption, so far.
Everybody's celebrating an imminent economic rebound and all the pessimists calling for rate cuts are capitulating, but I'd argue that the current situation is more like a plane taking off without enough fuel.
Moment of Truth is near for the Fed and Govenment policy makers. With what rising rates will do to an already deteriorating housing market and consumer spending, we're now going to find out very shortly if the Fed and other official positions believe their own BS that the housing market is not spilling over and affecting consumers. These past months and months to come will be looked back by economic historians with utter fascination.
"ECB President Jean-Claude Trichet said yesterday interest rates in the 13 euro nations are still low enough to support economic growth. The ECB also raised its growth forecast for the euro-area economy to 2.6 percent this year, from 2.5 percent.
Yields also rose after Fed Bank of Richmond President Jeffrey Lacker said growth will rebound this year because of ``healthy'' consumer spending. Merrill Lynch & Co. and Goldman Sachs Group Inc. this week scrapped their forecasts that the Fed would cut interest rates this year.
There's no point for the Fed to cut and that's bad for bonds,'' said Peter Schaffrik, a fixed-income strategist at Dresdner Kleinwort in London.That's haunting the market at the moment.'
So let me make sure that I understand the purported reasons for all of this....
Bond traders decided that economic news was better than expected, so no rate cuts were in the offing. Therefore interests rates go up.
But the rising rates makes debt more expensive, making LBOs, leverage, margin buying, and everything else "liquid" has the cost of financing go up. Therefore, the fear of rising debt costs cause the stock market to decline.
All because the economy is doing better than expected.
Welcome to bizarro-world 2007.
If interest rates keep going up, into the 7s, even those increasingly special individuals who expect to get an old-fashioned 80-20 fixed 30 year loan are going to have a harder time getting into a house at today's prices.
You can talk about prices dropping, but they've still got a long way to fall to get back to where they were 5-6 years ago, even accounting for inflation.
By one simple measure, the cash that homeowners took out from new mortgages dropped to a seasonally adjusted annual rate of $151 billion in the first quarter, down from about $168 billion in the fourth quarter of 2006.
competition for money part of this move up? large debt service requirements for consumer and gov't debt, plus the LBO crowd, plus the hedgies+carry trade, not to mention higher yields from Euro land.
Fred, just my piece of advice is that with rates rising and the curve steepening, you want to stay short. Maybe look into CDs out 6 - 12 months. They were yielding 5.2% a few weeks ago. The Fed is boxed into a corner because they didn't hike enough. We all know that inflation has been out of control (forget the gov't stats...they're bogus) but now the bond market has caught on. Mortgages will get a whole lot more expensive and resets will add to the pain. What happens to the mkt if LBO/M&A/securitization slows? The problem with bubbles is that they require the velocity of liquidity to increase to keep the party going. Good luck Ben!
There a few people on Wall Street who are trying to push the idea that there is a twenty-year trend of long-term rate declines which has just ended. Pretty much like they did with oil a few years back.
Crikey. Long bonds down a point and a half now. That's a 1.36% decline -- the sharpest drop I can find in any day for continuous long bond futures going back all the way to March 22, 2005. Yeah, I'd call it a massacre.
a, I've seen that chart as well dating back to the 1980s. I don't put much faith in charts and all but the trend is for higher yields and peopel will jump on trends and ride it as far as they can.
I can't remember the last time I saw yields move this high in a day...let alone the fact there wasn't any data to get people worked up. Just a nasty day.
all these stories on rate up on "strong economy" are just stories.
(see retail today)
I think China stopped buying T-Bonds but they may be back. keep in mind the sell of started after the Paulson talks with China. they want to show who is boss.
Mortgage convexity selling and duration shedding are just crushing the bond market today. Throw in a little de-carry trading starting to kick in now and this is the worst bond market massacre I can recall on a data-less day. Then again, I knew more about really bad fashion than interest rates back in the 70's and early 80's.
I agree that China is likely diversifying their trade surplus.
The stories don't add up.
Stocks are down because of the increasing risk-free return of Treasuries implies rotation out of stocks into Treasuries, but with Treasuries also declining there is a lot more selling than buying going on.
Corporate bonds are also selling off and the excuse is again the attractiveness of the risk-free return of Treasuries.
Yet Treasuries are down most of all even though all these other assets are supposedly rotating into Treasuries.
I suspect that China, Japan, Saudi Arabia, Kuwait, etc... are all diversifying some of their holdings out of T-bills.
Just goes to show that the Fed doesn't really control interest rates, the market does.
Rates aren't going up because wages are driving inflation. The depreciating dollar is driving inflation. Rates are going up because CBs are moving away from the petrodollar.
The fed has no control over the global economy, or the domestic economy for that matter.
Mortgage portfolios need to sell treasuries (or futures or interest rate swaps) because their duration increases as interest rates move higher, which effectively increases their interest rate risk at precisely the wrong time. It's a vicious cycle when rates are increasing, and a virtuous one when rates are heading lower.
Duration = weighted average term to maturity of a fixed income portfolio. As interest rates move higher, the math of declining bond prices increases the term to maturity of the portfolio, and portfolio sensitivity to interest rates is, roughly speaking, the convexity. Mortgage portfolios have a pronounced convexity as pre-payments decline as interest rates increase, hence mortgage portfolios selling anything they can get their hands on today to increase their hedge rations. Like I said, this works in reverse, and even more so, when rates are heading lower.
Aussie dollar rallies to 18-year high; New Zealand surprises
By Wanfeng Zhou, MarketWatch
Last Update: 2:01 PM ET Jun 7, 2007
NEW YORK (MarketWatch) -- The dollar rose against other major currencies Thursday, boosted by higher Treasury yields and reports that North Korea might have fired several missiles.
Treasurys sold off sharply Thursday, thrusting the benchmark yield above 5% for the first time since August, on the heels of a global sell-off of government bonds triggered by foreign rate hikes. See Bond Report.
"The dollar found some support from flight-to-safety flows," said Charmaine Buskas, economist at Moody's Economy.com. "It also gained as yields on long-dated Treasurys continue to rise and are now above the 5% level for the first time in nearly 10 months."
"The consensus is that global growth remains healthy and suggests that rates elsewhere across the globe [with the exception of the U.S.] are headed higher," she said.
"If China sells treasuries, then why dollar is up?"
When they sell treasuries, they recieve dollars, but the dollar isn't driven down until they sell (exchange) the dollars. Is this done immediately, or might a CB hold onto the cash for a bit?
The BRICs were always part of the bid, so they've always had the opportunity to set the price of Treasuries while still buying them....and if they walk away, eventually someone else ends up with their dollars and has to put it somewhere...treasury prices don't change this rapidly from reallocation games, I'd wager. I'm going to guess, with no supporting evidence, that a big treasury price drop means someone has finally been marked-to-market on a large loss and they were unable to finance their way down the road one more time. They probably have to liquidate the good stuff in their portfolio to pay off a bad bet, lacking other options.
Interest rates have jumped up today. The yield curve is now very uninverted. My opinion is this will decrease the likelyhood of a fed rate increase. Interest will go up without the feds help.
If this doesn't stop soon, housing is going to be much worse going forward than I think anyone could have imagined a year ago.
Reuters today
(quote)
Traders said selling from mortgage investors hedging against the rapid uptick in rates lent additional momentum to the market's hefty decline.
"We are being overwhelmed by mortgage-related selling," said Thomas di Galoma, head of Treasury trading at Jefferies & Co. in New York.
(end quote)
The resets this summer are going to be painful . . .
Bill Gross must be sitting close to a defibillator right about now, just in case.
June 7 (Bloomberg) -- Sales at Macy's Inc., J.C. Penney Co. and other U.S. retailers fell in May as shoppers curbed purchases due to higher gasoline prices and a sluggish housing market.
U.S. Retail May Sales Slow; Macy's Trails Estimates
I just checked and the ten yr yield is up 12 basis points. Holy S***. There must be a lot of debt dumping going on. This could lead to a debt selling panic.
Keep an eye on the HB's and financial stocks as well as the 10-year bond. The home builders are way down this morning (recovering a little) and if this continues, banks and other financials will continue to go down. Tomorrow I will be looking at Jim Stack's index of residential RE stocks. It has been sitting on long term resistance (from last summer).
Stack's index will proabably be updated tomorrow and his main graph does not require a sign in, at Investech.com
Is this the beginning of the US' process of "inflating away debts"? What will foreign CB's do with all those T-bills?
These rising rates could be fatal to the housing market and ultimately the consumer.
And I see the recent pickup in business activity as outpacing consumption, so far.
Everybody's celebrating an imminent economic rebound and all the pessimists calling for rate cuts are capitulating, but I'd argue that the current situation is more like a plane taking off without enough fuel.
There could be a hard landing just ahead.
Moment of Truth is near for the Fed and Govenment policy makers. With what rising rates will do to an already deteriorating housing market and consumer spending, we're now going to find out very shortly if the Fed and other official positions believe their own BS that the housing market is not spilling over and affecting consumers. These past months and months to come will be looked back by economic historians with utter fascination.
"ECB President Jean-Claude Trichet said yesterday interest rates in the 13 euro nations are still low enough to support economic growth. The ECB also raised its growth forecast for the euro-area economy to 2.6 percent this year, from 2.5 percent.
Yields also rose after Fed Bank of Richmond President Jeffrey Lacker said growth will rebound this year because of ``healthy'' consumer spending. Merrill Lynch & Co. and Goldman Sachs Group Inc. this week scrapped their forecasts that the Fed would cut interest rates this year.
There's no point for the Fed to cut and that's bad for bonds,'' said Peter Schaffrik, a fixed-income strategist at Dresdner Kleinwort in London.That's haunting the market at the moment.'
So let me make sure that I understand the purported reasons for all of this....
Bond traders decided that economic news was better than expected, so no rate cuts were in the offing. Therefore interests rates go up.
But the rising rates makes debt more expensive, making LBOs, leverage, margin buying, and everything else "liquid" has the cost of financing go up. Therefore, the fear of rising debt costs cause the stock market to decline.
All because the economy is doing better than expected.
Welcome to bizarro-world 2007.
If interest rates keep going up, into the 7s, even those increasingly special individuals who expect to get an old-fashioned 80-20 fixed 30 year loan are going to have a harder time getting into a house at today's prices.
You can talk about prices dropping, but they've still got a long way to fall to get back to where they were 5-6 years ago, even accounting for inflation.
Question: in a environment of rising interest rates, is holding any type of Federal debt bad? Or are short-term instruments (.5-3 years) still ok?
U.S. households' borrowing slows to nine-year low: Fed - MarketWatch
By one simple measure, the cash that homeowners took out from new mortgages dropped to a seasonally adjusted annual rate of $151 billion in the first quarter, down from about $168 billion in the fourth quarter of 2006.
competition for money part of this move up? large debt service requirements for consumer and gov't debt, plus the LBO crowd, plus the hedgies+carry trade, not to mention higher yields from Euro land.
Could we have higher yields and lower inflation?
Fred, just my piece of advice is that with rates rising and the curve steepening, you want to stay short. Maybe look into CDs out 6 - 12 months. They were yielding 5.2% a few weeks ago. The Fed is boxed into a corner because they didn't hike enough. We all know that inflation has been out of control (forget the gov't stats...they're bogus) but now the bond market has caught on. Mortgages will get a whole lot more expensive and resets will add to the pain. What happens to the mkt if LBO/M&A/securitization slows? The problem with bubbles is that they require the velocity of liquidity to increase to keep the party going. Good luck Ben!
CR,
Looks like with May sales fairly flat, it may not be safe yet to call for higher numbers in Q2 GDP as previously posted....atleast not yet.
AC, I am going with 1/3 less runway instead of the fuel analogy
There a few people on Wall Street who are trying to push the idea that there is a twenty-year trend of long-term rate declines which has just ended. Pretty much like they did with oil a few years back.
Crikey. Long bonds down a point and a half now. That's a 1.36% decline -- the sharpest drop I can find in any day for continuous long bond futures going back all the way to March 22, 2005. Yeah, I'd call it a massacre.
a, I've seen that chart as well dating back to the 1980s. I don't put much faith in charts and all but the trend is for higher yields and peopel will jump on trends and ride it as far as they can.
I can't remember the last time I saw yields move this high in a day...let alone the fact there wasn't any data to get people worked up. Just a nasty day.
all these stories on rate up on "strong economy" are just stories.
(see retail today)
I think China stopped buying T-Bonds but they may be back. keep in mind the sell of started after the Paulson talks with China. they want to show who is boss.
Mortgage convexity selling and duration shedding are just crushing the bond market today. Throw in a little de-carry trading starting to kick in now and this is the worst bond market massacre I can recall on a data-less day. Then again, I knew more about really bad fashion than interest rates back in the 70's and early 80's.
Referring to the news mentioned at the top of the comments.
Can someone please educate about this mortgage investors are selling treasury bonds stuff ? Thanks in advance.
I thought mortgage investors buy MBS. Why did they buy treasuries and dumping them ? Or they are dumping both MBS and treasuries ?
Yal,
I agree that China is likely diversifying their trade surplus.
The stories don't add up.
Stocks are down because of the increasing risk-free return of Treasuries implies rotation out of stocks into Treasuries, but with Treasuries also declining there is a lot more selling than buying going on.
Corporate bonds are also selling off and the excuse is again the attractiveness of the risk-free return of Treasuries.
Yet Treasuries are down most of all even though all these other assets are supposedly rotating into Treasuries.
I suspect that China, Japan, Saudi Arabia, Kuwait, etc... are all diversifying some of their holdings out of T-bills.
Just goes to show that the Fed doesn't really control interest rates, the market does.
Rates aren't going up because wages are driving inflation. The depreciating dollar is driving inflation. Rates are going up because CBs are moving away from the petrodollar.
The fed has no control over the global economy, or the domestic economy for that matter.
To bubble, or not to bubble. A Hobbesian choice.
If China sells treasuries, then why dollar is up?
Mortgage portfolios need to sell treasuries (or futures or interest rate swaps) because their duration increases as interest rates move higher, which effectively increases their interest rate risk at precisely the wrong time. It's a vicious cycle when rates are increasing, and a virtuous one when rates are heading lower.
You better explain duration. A lot of people are unfamiliar with bond market concepts
Duration = weighted average term to maturity of a fixed income portfolio. As interest rates move higher, the math of declining bond prices increases the term to maturity of the portfolio, and portfolio sensitivity to interest rates is, roughly speaking, the convexity. Mortgage portfolios have a pronounced convexity as pre-payments decline as interest rates increase, hence mortgage portfolios selling anything they can get their hands on today to increase their hedge rations. Like I said, this works in reverse, and even more so, when rates are heading lower.
If China sells treasuries, then why dollar is up?
Dollar follows Treasury yield higher
New York Times
Aussie dollar rallies to 18-year high; New Zealand surprises
By Wanfeng Zhou, MarketWatch
Last Update: 2:01 PM ET Jun 7, 2007
NEW YORK (MarketWatch) -- The dollar rose against other major currencies Thursday, boosted by higher Treasury yields and reports that North Korea might have fired several missiles.
Treasurys sold off sharply Thursday, thrusting the benchmark yield above 5% for the first time since August, on the heels of a global sell-off of government bonds triggered by foreign rate hikes. See Bond Report.
"The dollar found some support from flight-to-safety flows," said Charmaine Buskas, economist at Moody's Economy.com. "It also gained as yields on long-dated Treasurys continue to rise and are now above the 5% level for the first time in nearly 10 months."
"The consensus is that global growth remains healthy and suggests that rates elsewhere across the globe [with the exception of the U.S.] are headed higher," she said.
"If China sells treasuries, then why dollar is up?"
When they sell treasuries, they recieve dollars, but the dollar isn't driven down until they sell (exchange) the dollars. Is this done immediately, or might a CB hold onto the cash for a bit?
So, the Kiwis raise their interest rate and Treasuries tank. Helicopter Ben is a spectator, just like Greenspan was.
Charlie- "If this doesn't stop soon, housing is going to be much worse going forward than I think anyone could have imagined a year ago."
Yeah, no s@*t.
Bits and data from postings:
Mortgage convexity selling
duration shedding
de-carry
dollar up
One explanation = risk aversion increasing.
I wouldn't get too excited about today. We'll all know it when it the cycle turns.
The BRICs were always part of the bid, so they've always had the opportunity to set the price of Treasuries while still buying them....and if they walk away, eventually someone else ends up with their dollars and has to put it somewhere...treasury prices don't change this rapidly from reallocation games, I'd wager. I'm going to guess, with no supporting evidence, that a big treasury price drop means someone has finally been marked-to-market on a large loss and they were unable to finance their way down the road one more time. They probably have to liquidate the good stuff in their portfolio to pay off a bad bet, lacking other options.
One thing to add:
When you have to pay the piper, wouldn't you liquidate your lowest yield investment out of sheer habit?
Maybe the stock market sell off is also a little bit of cashing out to pay off other bad debts.
Maybe the CDO/MBS losses are finally stuck in the hands of final bagholders who aren't able to find a greater fool.
Turbo,
doesn't declining home prices do the same ? (push duration)
Lloyd - thanks.
Pimco's Bill Gross says he's now a "bear fund manager."
I think it could just be a reversion back to fundamentals.
Simply no reason for the run up over the past year.
Just a simple reversion, nothing more.