With 10 Year A Breath Away From 3.00%, Just 50bps Left Until The “Disorderly Rotation”
We are assured by the great and good of the status quo that 10Y rates bursting through the 3.00% barrier (its highest in 26 months) will not hinder the housing recovery (as affordability plunges), slow equity buybacks (via increased cost of capital), or crush bank earnings (via AFS losses and NIM compression as the curve flattens). Bond yields are rising as a ‘positive’ sign for the economy… must be right? But wasn’t it Steve Liesman just 2 weeks ago, amid his “best nailing it on CNBC in years”, that proclaimed 10Y would hit 2.65% before 3.00%? As we warned 3 weeks ago, a move to 3.0% will create more meaningful outflows from retail and ETFs and 3.5% is the trigger for a “disorderly rotation,” from risk to cash.
10Y shifts rapidly towards 3.00% for the first time since July 2011…
oh and by the way, for those who are more concerned at the ‘pace’ of the move, as opposed to the level of rates – this is the fastest rise in mortgage rates in 5 years…
Cashin: 10-year Treasury yield could be a market ‘trip wire’
“Traders are concerned that the area between 2.95 and 3 percent might be a trip wire. It used to be closer to 2.91, but we’re inching up and I think we’re very close to it. If it hits, it’d be interesting to see if it causes the bids to disappear in equity,” Cashin told “Squawk on the Street” Thursday.
“Rising interest rates are a killer in an over-levered economy, and that’s exactly what we’ve been seeing in the United States.
This surge in interest rates may have already seriously destabilized the entire financial system, and that’s why there is this meeting taking place in the White House today. The fact is that the vast majority of derivatives in the global financial system are related to interest rates.
Now, the entire financial system may be on the precipice of some sort of catastrophic event unfolding
Embry just said: “I strongly believe that had the 10-Year bond roared through a 3% yield, that really would have unleashed chaos in the derivatives market. Once there is an explosion in the derivatives markets, it becomes a cascading series of blowups and it completely destabilizes the entire financial system. So there was clearly an intervention in bonds, and that has delayed the inevitable, at least in the short-term. ”
$17 Billion of ETF Outflows in August Were Largest in History
Most of that amount, $14 billion, was pulled from the SPDR S&P 500 ETF, as jittery investors worried about the stock market.
Investors Pull $7.7 Billion From Pimco Total Return Fund in August
Bill Gross’s Pimco Total Return Fund, the world’s largest bond fund, lost $41 billion of its assets in the past four months through withdrawals and price losses, according to data from Morningstar Inc on Wednesday.
Why Investors Are Fleeing Both the Bond and Stock Markets
Pimco’s Gross says global economy has become increasingly unstable
In his September letter to investors, Gross said that central banks’ easy money policies have become less effective in generating economic stability, and that zero-bound interest rates have threatened finance and investment in the “real economy.
We have not seen so many financial trouble signs all come together at one time like this since just prior to the last major financial crisis:
#1 The yield on 10 year U.S. Treasuries has risen for 5 of the past 6 days, and it briefly touched the 2.90% level on Monday.
#2 Rapidly rising interest rates are spooking investors and causing them to pull money out of bonds at a very rapid pace…
Investors have yanked nearly $20 billion from bond mutual funds and exchange traded funds so far in August. That’s the fourth highest pullback ever, according to TrimTabs data. In June, investors took out $69.1 billion — the highest on record.
#3 The sell-off of U.S. Treasuries is being led by foreigners. In particular, China and Japan have been particularly aggressive in selling off bonds…
China and Japan led an exodus from U.S. Treasuries in June after the first signals the U.S. central bank was preparing to wind back its stimulus, with data showing they accounted for almost all of a record $40.8 billion of net foreign selling of Treasuries.
The sales were part of $66.9 billion of net sales by foreigners of long-term U.S. securities in June, a fifth straight month of outflows and the largest since August 2007, U.S. Treasury Department data showed on Thursday.
China, the largest foreign creditor, reduced its Treasury holdings to $1.2758 trillion, and Japan trimmed its holdings for a third straight month to $1.0834 trillion. Combined, they accounted for about $40 billion in net Treasury outflows.
#4 Thanks to rapidly rising bond yields, some of the largest exchange-traded bond funds are getting absolutely hammered right now…
• The $18 billion iShares iBoxx $ Investment Grade Corporate Bond fund (ticker: LQD) has fallen 7.94% since May 2, according to S&P Capital IQ. That’s including reinvested interest from the fund’s bond holdings.
• The 3.7 billion iShares Barclays 20+ Year Treasury Bond (TLT) has plunged 15.9% the same period. Longer-term bonds typically get hit harder when rates rise than shorter-term bonds. For example, the iShares Barclays 3-7 Year Treasury Bond fund (IEI) has fallen 3.2% since May 2.
• PowerShares Emerging Markets Sovereign Debt (PCY), which invests in government bonds issued in developing countries, has fallen 12.7%. The fund has $1.8 billion in assets.
#5 In recent weeks we have witnessed the largest cluster of Hindenburg Omens that we have seen since prior to the last financial crisis.
#6 George Soros has bet a tremendous amount of money that the S&P 500 is going to be heading down.
#7 At this point, the S&P 500 has fallen for 9 out of the last 11trading days.
#8 Margin debt has spiked to extremely dangerous levels. This is a pattern that we also saw just before the last financial crash and just before the dotcom bubble burst…
The exuberant mood comes as margin debt on Wall Street hovers near $377bn, just below its all-time high and well above peaks before the dotcom crash and the Lehman crisis.
“Investors have rarely been more levered than today,” said Deutsche Bank, warning that the spike in margin debt is a “red flag” and should be watched closely.
10Y 3.0% AND RISING!!!
Douche Bank having trouble…Again.
WSJ: Investors See 10-Year Treasury Yield Headed for 3 Percent
‘Bad idea’ if Fed wages war on higher bond yields
Unemployment Rate Surges To Highest Since 2011 – Gallup Polling
In a word: it is not pretty (which, again, is good for those who are hoping and praying St. Ben will keep the monetary Kool Aid running for a little bit longer): at 8.6% it is over 1% higher than the BLS’ reported print, and is the highest since the end of 2011.
The student loan bubble is starting to burst
China, Japan lead record outflow from Treasuries in June
Bond-based mutual funds are taking a beating:
From June 2013
U.S. Bond Funds Suffer Second-Most Redemptions Since 1992