Treasury ETFs Continue Sell-Off as 10-Year Yield Climbs Above 2.6%
The Surge In Interest Rates Is Unlike Anything We’ve Seen In At Least 50 Years
Uni-directional trend, no buyers what so ever.
In the past when the bonds sold off and the S&P rallied it was called an “asset allocation.”
There is also a “flight to quality” — when stocks sell off the money moves into the bond market — but that isn’t happening either.
The current selloff is neither; it’s what they call straight liquidation. …
In 2007, at the onset of the credit crisis, we said many times that there was a big party on Wall Street and that we were not invited. But we said that when the party ended we (the public) would have to pay for it. Well, the Fed put that process off with its quantitative easing programs and all the new money it printed.
Fabian Calvo-Real Estate, Dollar and Bond Collapse Simultaneously
“We’re seeing substantial selling across the board. When it comes to high quality fixed income…all the way down to high yield. We’re seeing the same thing in munis, high quality as well as high yield,” said Zane Brown, fixed income strategist at Lord Abbett.
The move in Treasury rates has triggered a ripple effect across credit markets. On Monday, the SPDR Barclays High Yield Bond ETF, JNK, was down 1.1 percent at 38.70, and the iShares iBox Investment Grade Corporate Bond Fund was down 0.7 percent Monday at 111.48, but it recovered slightly in after-hours trading. The iShares S&P National AMT-Free Municipal bond Fund ETF MUB was down 0.8 percent Monday.
“I think ETFs [exchange traded funds] are really fueling this downdraft in prices because people can sell ETFS very quickly and the managers of the ETFs are selling indiscriminately,” he said. Brown said rates may be getting close to finding the high water mark, for now, and he suggests finding beaten down securities, particularly high-yield.
Traders are starting to worry that the S&P 500 has been living a dream for months
Wondering why the money world got its knickers in a twist last week? The answer is simple: the global economy is breaking apart and its constituent major players are doing face-plants on the downhill slope of a no-longer-cheap-oil way of life. Let’s look at them case by case.
The USA slogs deeper into paralysis and decay in a collective mental fog of disbelief that its own exceptionalism can’t overcome the laws of thermodynamics. This general malaise precipitates into a range of specific quandaries. The so-called economy depends on financialization, since it is no longer based on manufacturing things of value. The financialization depends on housing, that is, a particular kind of housing: suburban sprawl housing (and its commercial accessories, the strip malls, the box stores, the burger shacks, etc.). Gasoline is now too expensive to run the suburban living arrangement. It will remain marginally unaffordable. Even if the price of oil goes down, it will be because citizens of the USA will not have enough money to buy it. Lesson: the suburban project is over, along with the economy it drove in on.
But so is the mega-city project, the giant metroplex of skyscrapers. So, don’t suppose that we can transform the production house-building industry into an apartment-building industry. The end of cheap oil also means we can’t run cities at the 20thcentury scale. That includes the scale of the buildings as well as the aggregate scale of the whole urban organism. Nobody gets this. For one thing, there will be far fewer jobs in anything connected to financialization because that “industry” is imploding. The recent action around the Federal Reserve illustrates this. When chairman Bernanke’s lips quivered last week, the financial markets had a grand mal seizure. He floated the notion that his organization might “taper” their purchases of US government issued debt and mortgage-backed securities — the latter being mostly bundled debt originated by government-sponsored entities and agencies. That’s the “money” that supports the suburban sprawl industry.
If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage bundlers could only sell the stuff if they paid higher interest rates. But the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.
Apart from that unhappy equation, entropy never sleeps. Everything in America except the Apple stores and a handful of big banks is falling apart — especially the human habitat and households. Suburbia will only lose value and utility. Big cities will have to get smaller (ouch!). Tar sands, shale oil and shale gas will not ride to the rescue (they cost too much to get out of the ground). The entire declension of government from federal to state to local will be too broke to fix the roads and make “transfer payments” to idle, indigent citizens. This populace will lose faith in their institutions… and disorder will eventually resolve in a new and very different disposition of things on-the-ground. If we’re lucky, this will not include cruel despotic leadership and war.
If the “taper” talk is empty rhetoric, and the Fed continues sopping up issued debt, it will eventually destroy the credibility of its issued money. That is just another way of going broke, though it might beat a shorter path to the general loss of legitimacy of governments and other institutions.
More than 1.6 million options have traded in the SPDR S&P 500 Fund (SPY), with 1 million puts.
The iShares Russell 2000 Fund (IWM) has seen 412,000 contracts trade as puts outpace calls by 3 to 1.
The iShares Emerging Markets Fund (EEM) has volume of 250,000 and a put/call ratio of almost 3 to 1.
Following closely is the iPath S&P 500 VIX Short-Term Futures Note (VXX) at 234,000 options, with 125,000 puts.
The CBOE Volatility Index (VIX) has 160,000 options traded, with calls outpacing puts by 2 to 1.
China, Higher Rates, and a Smorgasbord of Problems
Possible support levels
This RT @CiovaccoCapital
Gentleman, could get ugly for stocks IF (emphasis) the VIX clears this channel
These leading indicators are suggesting a global slowdown is at hand!
CLICK ON CHART TO ENLARGE
The Shanghai index broke below 20-year support line (1) in the chart above, attempted to climb back above this new resistance line and looks to have failed at (2). Now the Shanghai index is breaking down further and Copper is breaking a three year support line at the same time.
These leading indicators breaking support at the same time are suggesting a global slowdown is near.
Do these breakdowns reflect the “Perfect Portfolio Storm” is about to happen or is happening?
CLICK ON CHART TO ENLARGE
The above chart reflects that Government bonds and stocks are working on breakdowns at the same time, a further suggestion something is going on that investors haven’t seen many times in the past 13 years!
CLICK ON CHART TO ENLARGE