http://www.zerohedge.com/news/treasury-spasms
Submitted by Tyler Durden on 08/20/2012 18:11 -0400
Treasury Spasms
As Bill Gross has been more than happy to demonstrate on several recent occasions, the recent sell off in US Treasurys has been sharp and violent, wiping out all year to date capital gains in the 10 Year in a few short weeks. The flipside to that is that this is not the first such headfake in the bond market, and it certainly will not be the last as David Rosenberg shows today with a chart summarizing all the "spasms" experienced in the 10 year Treasury since 2007. In fact, based on the average duration and move severity, the 10 Year sell off may not only continue for twice as long (on average it has been 49 days, and we are only 19 days in in the current sell off episode), but the final tally may be a further selloff well into the 2% range (the average decline in yield is 88 bps, double the 43 bps widening to date). At the end of the day will it make much of a difference? Very likely not: after all the deflationary implosion has far more to go before all the central banks
engage in coordinated easing, and as a result superglue the CTRL and P
buttons in the on position, leading to the final round in the global
currency devaluation race.
engage in coordinated easing, and as a result superglue the CTRL and P
buttons in the on position, leading to the final round in the global
currency devaluation race.
Rosie's summary:
Of course the Treasury market would sell off in this backdrop, and the 10-year note yield has already moved up more than 40 basis points from its nearby multi-decade low.It was overbought then. It is oversold now... which is why it successfully tested the critical support around the 1.87% level late last week.But let's not pretend we haven't seen these hiccups before. We have had no fewer than eight such episodes of 40+ basis point spasms since yields peaked in the summer of 2007. Each one did not last long and presented a gift of a buying opportunity for patient investors who have an ability to see the forest past the trees. Typically, these hiccups last 49 trading days and the yield rises an average 88 bps, with about three-quarters of the prior rally being reversed.So can this last another month? Recent history says yes.Can we see a move to the 2-2.25% band during this time? Recent history says yes.But is this anything more than a blip in what is still a secular bull market in bonds? Again, recent history would say yes.Finally, the definitive signal to go long the bond again will be just as Goldman says to short it, which as readers will recall, is precisely what happened the last time Goldman said it was a once in a lifetime opportunity to sell bonds and go long stocks. We all know what happened next.
and..........
http://news.goldseek.com/GoldenJackass/1337803200.php
 By: Jim Willie CB, GoldenJackass.com |
-- Posted Wednesday, 23 May 2012 | | Source: GoldSeek.com
The Biblical story is told of a tower built ever higher in order to achieve contact with the heavens, lest they be scattered upon the earth. They were scattered when the tower fell. Fast forward to today, where the earth has a multitude of tribes, languages, and several major alphabets. When the Lehman Brothers failure occurred, and the Fannie Mae and AIG activities were to be concealed under court orders, the land turned barren, and a financial plague befell the Western nations led by the United States. They were after all, the keepers of the ark (printing press for USDollars). But a plague of debt locusts was cast upon the US nation, with annual $1.5 trillion deficits. The Americans in their unending arrogance, chose to speak from the tower top and to proclaim 0% forever, suspending gravity. They have attempted to force free money to finance their USGovt debts, to preserve power, to ensure privilege, but in doing so they defy nature in testing gravity itself.
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The recent losses from JPMorgan have proved to be much more based upon suspending gravity with 0% official rates in the Delta-Hedging complex game tied to the vast over-burdened Interest Rate Swap contracts, rather than the European sovereign bonds as first claimed. The Jackass is on record on May 11th, aided by the indefatigable forensic analyst Rob Kirby, in pointing to Interest Rate Swap stresses from the sudden March and April movement in the 10-year USTreasurys within the strained bloated USGovt sovereign bond market. The IRSwap setbacks were the underlying cause of the JPM losses. The giant bank does not want attention give to this derivative tool which controls the bond market in a devious artificial manner. As far as debt is concerned, the United States is Greece times 100. It is Italy times 20. It receives a pass from the bond market, precisely because the nation prints the money and controls the vast Interest Rate Swap support mechanism. But the tower is finally exposed.
The IRSwaps act like giant buttresses to support the evergrowing USTreasury Tower of Babel that stretches to the sky. Every year, the expansive tower grows another $1.5 trillion higher. Every year, the challenge grows exponentially for the JPMorgan master financial engineers to apply their control panel magic to achieve equilibrium. Every year, the degree of difficulty becomes more arduous. Every year, the tower must withstand the high winds from Europe, where the bond market is doing more than undergoing stress. It is crumbling before our eyes. In a way,Europe helps to conceal the great strains from the broken USTreasury Bond market, held together by interest derivatives. Few analysts connect the failure of the Draghi LTRO funds to the JPMorgan losses. They do not grasp the gravity of the USTBond problem. They prefer to focus on FINREG for regulatory changes centered on the Volcker Rule, or on the division of proprietary trading. They focus on the personalities of the so-called Whale. Now a new verb has entered the lexicon, as a firm was just "Iksil-ed" to mean they suffered massive leveraged losses in a high risk game of playing god in the financial markets. JPMorgan cannot hedge since THEY ARE THE MARKET. What the Whale or JPMorgan do is attempt to maintain balance of the USTreasury Tower of Babel, which grows every year to try to touch the sky, to achieve the perfect world. They scrape the devil's attic door instead.
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ENGINEERED FLIGHT TO SAFETY
The hidden tool to maintain the 0% interest rate when supply grows by $1.5 trillion annually, and when dependence on the USFed for bond monetization picks up the slack, is the Interest Rate Swap contract. JPMorgan would prefer that the public not learn about it. Back in December 2010, Morgan Stanley added $8 trillion to its Interest Rate Swap book in a single quarter. Look to see the wondrous effect from that lever pulled behind the curtain. Bear in mind that the accounting for the derivative book, listed in the Office of the Controller to the Currency, is quarterly and tallies the past quarter of activity. My belief is there is more lag to the proper accounting. Notice how the 10-year USTreasury Bond yield (aka TNX) went from a threat to the 4.0% mark in early 2010 and rallied hard all the way down to the 2.4% mark by summer's end. The US financial press hailed a grand flight to safety in the USGovt Bond securities. No such flight to safety like a thundering herd was part of the reality landscape. Let the chart be shown with GREEN text to reflect the application of USDollars from the financial engineering rooms.
What the Interest Rate Swap does is to create artificial demand for the end product USTBond, no real buyer, in a magnificent display of 50:1 leverage, sometimes as much as 100:1 leverage. Repeat that -- no real buyer of the USTBond, all artificial, all coming from the IRSwap device. Few bond experts even realize this fact of bond life. The pronounced effect on the US bond market brought about a change in sentiment, and reinforced the phony notion that investors were flocking to the USTBond market for safety. The reality was the exact opposite. Bill Gross of PIMCO was exiting the USTBond market. A slew of foreign creditors exited the USTBond market. The bank analysts were confused, unable to explain the rally in USTBonds and falling bond yields when supply was growing in a big way, but demand was vanishing. The USFed had to admit its bond purchases within its QE initiative in order to explain the inconsistency. The huge annual deficits and departure of bond buyers forced the USFed into the open, where they had to admit their QE and its hyper monetary inflation.
ENGINEERED REJECTION OF USGOVT DEBT DOWNGRADE
In early August 2011, the debt rating agency Standard & Poors downgraded the USGovt debt. It was an insult of high order, delivered during the Greek Govt Bond crisis, as the Southern European bond market was under great scrutiny and strain. The JPMorgan situation room was obviously tipped off, pressed into action, and ready at the Interest Rate Swap lever. The result was profound as the TNX fell from 3.2% down to under 2.0% by the time the dust cleared. Notice a near accident in June in the USTBond market just before the big decline in bond yields, a big oops! The TNX jumped from 2.88% to 3.20% in a single week, a hefty 32 basis point scare. The JPM situation room responded quickly. Word leaked out about the S&P debt downgrade, the first in US history. The market move was becoming clear, a selloff. The Interest Rate Swap lever was yanked, and the effect pulled down the TNX significantly, as the financial press obediently proclaimed a victory over the S&P defiant downgrade. It was all phony, again!! The USGovt barkers even pounded the tables to point out a grand market contradiction of the Standard & Poor debt downgrade of the USGovt debt. Victory over the marketplace was won, and no big debt insurance contract rise either. All hail the IRSwap weapon in private Wall Street offices, of course without recognition of its heavy usage.
By this time, in late summer 2011, the financial market sentiment had solidified its phony psychological notion of the USTreasury Bond being a reliable safe & secure place to hide. The USFed was repeating its assured interest yield paid to Excess Bank Reserves, another false story. In reality, the USFed was paying the big US banks to place their Loan Loss Reserves at the USFed in order to conceal the insolvency of the USFed balance sheet. The big US banks compounded the flagrancy of the action by removing loss reserves later, calling them profit, in order to conceal their own business decline and deep deterioration. They did so because they became dangerous illiquid.
****
consider the last time ten year rates rose ( about 47 bps from late Feb low yield of 1.92 to March high of 2.39 in March , shortly thereafter we saw the JP Morgan " London whale " debacle ) .... then consider the recent rise in rates - 43 bps from the ten year low yield of 1.39......
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