The Return of Risk?
Department of Treasury Seal (Photo credit: woodleywonderworks)
We take a brief look at two interesting Treasury Yield curves today.
The first Yield Curve takes a snapshot view of the yield curves at the end of Q1 2011 and Q1 2012.
What is very noticeable is the fact that the overall yields for the end of Q1 2012 is significantly lower than a year ago. Taking a look at the at the 5 year T-Note yields as an example, the spread between the end of March 2011 (5Yr T-Notes at 2.24% ) and the end of March 2012 (5Yr T-Notes at 1.04%) was 1.20% down. The question is what factors drove down the ‘risk-free’ rate on US Treasuries?
However, turning our attention to the second graph below, indicates a slightly different perspective; and hence the title of this post. Has and is risk returning to the capital and stock markets to levels we previously experienced?
Not quite, is the short answer, because the spread between 31 December 2011 (0.83%) versus the 1.04% rate at the end of March 2012, only indicates an uptick of 21 basis points in the yield rate. The significance is not the percentage spread, but rather the direction of movement and we will continue our analysis at the end of Q2 2012 to establish whether the direction in Q1 2012 will be maintained into Q2 and beyond.
The final question to ponder is this:
Are we finally seeing the corner turned, or are there still significant risks in the global economy and sovereign debt markets to cause a few further after shocks in the months to come?
theMarketSoul ©2012
Related articles
- Where will all the new money come from? (themarketsoul.com)
- The BIG Sovereign Debt Structure cliff – Part 1 (themarketsoul.com)
- The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
- The Real Yield Curve and a Double-Dip Recession (yelnick.typepad.com)
- Pricing of liquidity (jrvarma.wordpress.com)
- Rates are rising! Oh wait, scratch that. (theglobeandmail.com)
- Treasurys bounce back as European debt falters (sfgate.com)
- Analysts see more gradual rise in U.S. Treasury yields (theglobeandmail.com)
- Is the bond market tightening for the Fed? (superbullinvestor.com)
- Surging U.S. Treasury yields set to take a breather (theglobeandmail.com)
The BIG Sovereign Debt Structure cliff – Part 1
In yesterday’s article, “Where will all the new money come from?” we concluded the brief analysis with the Sovereign Debt Maturity profiles (otherwise known as the Debt Structure) of both the USA and Italy, noting how similar the two profiles looked at first glance.
Image via Wikipedia
Digging a bit deeper today, we would like to compare those charts to cliff edges. We trust that the sentiment of the article is that we perceive Central Banks across the globe fretting about the ‘New Money’ we were referring to. With general economic confidence waning and the outlook for a sustainable long-term solution to sovereign over (indulgence) spending fading, the landscape is looking very bleak at moment.
New money will have to be printed (Quantitative Easing or QE) if investors in the capital markets cannot be found to bear the burden of purchasing new Bond and Treasury issues.
Image via Wikipedia
Some headlines over the few weeks alluded to Bond auctions in Portugal, Italy and Spain being well supported (see related article at the bottom of this post), but these were not major refunding and roll-over exercises. Greece is continuing to be a welcome distraction for politicians and Central Bankers in both taking investor’s eye off the bigger problems coming along the line in Q2 2012 and in winning time to hopefully come up with a credible longer-term plan to reduce debt levels and then return to growth.
Auction Calendars
Let’s take a look at some of the crucial Sovereign Debt auctions coming up in the next few months:
The link below provides a time table schedule issued by the US Treasury for T-Bills, T-Notes, T-Bonds and TIPS, for at least the next six months.
To get the equivalent Eurozone calendar is not so easy. (Partly because each individual country issues Bonds, as there is no Central Eurozone issuer of Bonds, but at least a central purchaser, namely the ECB – European Central Bank)
Image via Wikipedia
We are currently investigating sources of information for Eurozone Sovereign Debt Bond auctions and will return to this theme in very near future.
theMarketSoul ©2012
Related articles
- Italian Debt Auction Sends Yields Tumbling: What Investors Need to Know (fool.com)
- Investors eye European bond auctions (bbc.co.uk)
- Successful debt auctions give boost to Spain and Italy (independent.co.uk)
- Italy borrowing rates drop again in bond auction (newsok.com)
- Italy sells more bonds as Greece struggles with debt (ctv.ca)
- Italian Debt Auction Sends Yields Tumbling: What Investors Need to Know (dailyfinance.com)
- Stock Market To Cast Confidence Vote On Eurozone Monday After Disastrous German Debt Auction (jhaines6.wordpress.com)
- Italy’s borrowing costs tumble after debt auction (guardian.co.uk)
- S&P cuts French rating to AA, hurting eurozone confidence (ctv.ca)
- Eurozone faces tough hurdles early in 2012 (sfgate.com)
- EU Faces Debt Hurdles Early in 2012 (abcnews.go.com)
- The road ahead for the struggling eurozone economy (oregonlive.com)
- Eurozone faces tough hurdles early in 2012 (seattletimes.nwsource.com)
- The eurozone’s borrowing costs may stay lethally high (bbc.co.uk)
- Buba’s Jens Weidmann Voted Against ECB’s Decision To Undermine The Sovereign Bond Market (zerohedge.com)
- Eurozone will pivot on Italy in 2012 (cbc.ca)
- Eurozone faces tough hurdles early in 2012 (ctv.ca)
- Stock Market Plunges On German Debt Concerns (huffingtonpost.com)
The Flight – Keeping an eye on the real 30 Year Treasury Yield Rates
The real (inflation adjusted) 30 Year T-Bill rates have since the beginning of the year averaged 1.72% (simple averaging).
Since the beginning of September 2011 the average real rate has dipped to below 1.00% to 0.99%. (Our measurement).
Does this mean that the flight to other asset classes is now in full-swing or rather; where on the ‘flight to safety’ trajectory do we believe we are now?
We offer no opinion, but keep your beady eye on the T-Bill rates in the months to come, especially when the election process officially kicks off in the USA.
theMarketSoul ©2011
US Treasuries – A steady erosion in confidence?
For today’s brief analysis of the US Treasuries (T-Bill) Yield rates, we constructed the chart and table below utilising data from the US Treasury official site.
We took a point in time being mid August for 5 consecutive years from 2006 through to 2011 and compared the 1-month through to 30 Year T-Bill Yield Curves.
As can be seen, the slope of the curves from 2006 – 2011 on all T-Bills is downward from left to right.
Some analysts view this as an erosion in confidence over this specific time period, with the lower yields indicating lower confidence in the US economic situation. This feels a bit counter intuitive, when we compare it to our article The US Treasury Yield Curves – Are the markets really that bothered? However, the argument is that there is a ‘flight to safe-haven / alternative asset classes’.
However, it might only partly explain the Standard & Poor’s position.
In tomorrow’s chart, we will expand the time horizon we are looking at to 10 years and choose the quarter ends to see if a different picture and analysis emerges for 1 Year and 10Year US T-Bills.
theMarketSoul © 2011
US Treasuries – 4 trading days on and rates look rosy?
Today’s brief commentary piece tracks the US Treasury Yield curve of 5 August 2011 (before the Standard & Poor’s downgrade announcement) and the closing rate on 10 August 2011.
As can be observed, across the board, the T-Bill yields of 10 August are lower than on 5 August 2011.
It begs the question:
Is a ratings agency downgrade actually good for business?
The table below reinforces the point:
At least the volatility we have been observing in the stock markets of late, has not yet manifested itself in the capital markets. How long can this continue?
US Treasuries – An FX or a market call?
So it has finally happened. After threatening for months that a credit rating down grade was probable for the USA, Standard & Poor’s finally took the ‘big step’ on Friday 5 August, after the major markets closed.
Image via Wikipedia
So what next?
In our article ‘US Treasuries – Are the markets really that bothered?‘ published on 30 July 2011, we argued that the markets were not really bothered, as both 5 & 7 year T-Bill currently delivered a negative Real Return to investors.
Everyone is dreading the opening bells in stock capital and forex market on Monday, yet we believe the fundamental question for this week will be:
Is this an FX or market call?
What we meanby this question is:
Will the markets and market participants see the down grade as an opportunity to play an FX gain game; or has the game fundamentally shifted and will the capital markets react by demanding a higher nominal or at least Real Return on US Treasury bills?
All pointers at the moment did not indicate a problem, but time will tell on whether a fundamental shift in attitude has occurred. Remember a credit rating is only a qualitative indicator, not a quantitative one, so on a technical call a few FX traders and investors might make a profit or two; but we are all waiting to see if the entire game has changed, or not.
Other factors that might come into play soon would be QE3 and attitude hardening by major T-Bill investors.
How the US Treasury and administration now react will be crucial.
Who are we going to trust to make this big call?
Image via Wikipedia
theMarketSoul © 2011
Pleae refer to our disclaimer page
Related articles
- Macro Ideas – Is dollar-yen headed to 80-82? Guest Post by Matein Khalid (greatlakesforex.wordpress.com)
- Proformative Hosts FX Risk Management Events featuring Western Union, FiREapps and Treasury Strategies (prweb.com)
- Forex Trading 2012 – Highly Intelligent Robot Announced with FX Managed Accounts (prweb.com)
- Goldman Lists What To Expect In FX For The Remainder Of The Year (zerohedge.com)
- InvestTechFX offers FX Traders Competitive Spreads in Response to China’s Increased Stake in Europe (prweb.com)
A sigh of relief?
Some say that in life timing is everything…
And so too it is with economics. We don’t yet have a fully developed and ‘mature’ [in terms of life-cycle] grasp of the impact of timing with leads and lags in the economy in general.
Yes, we have very sophisticated and advance models, analytics, knowledge management, quantitative theories, etc.; but we still do not fully comprehend the impact of time and timing in general on the factors of production influencing our ‘modern’ global economy.
In short, it looks like the potential calamitous US Debt Ceiling crisis has been averted (events during Monday 1 August still need to unfurl), meaning that the US nation can continue to settle its debt obligations for a little while longer, without President Obama having to resort to the 14th Amendment.
And this is where the timing conversation picks up its thread again. The Debt Ceiling needs to the raised in order to settle obligations already incurred, not new spending. Therefore, the future continues to look uncertain for the point at which ‘peak US Debt’ will be reached and how long creditor nations and other institutions will continue to fund the US appetite for amassing what seems to be an insurmountable and unsustainable level of sovereign debt. In our previous article we discussed the negative Real US T-Bill Yields on both new 5 and 7 year US Treasuries. If this is anything to go by, ‘peak US Debt’ must still be little while off in the distant future.
If only we could get the timing thing right and have a more insightful and meaningful (adult) debate not just in the US, but including global partners, both creditors and debtors alike.
But such is the nature of markets and spontaneous order, as espoused by our friends at the Austrian School, that we still believe and endorse the fact that ‘the market’ is still the best and most efficient mechanism for allocating resources (even financial and debt instruments) and informing the participants of potential risks and opportunities for clearing this market.
theMarketSoul ©2011
The US Treasury Yield Curves #2 – Do you factor inflation into the deal?
In the previous article we posted, mention was made of the (0.72)% [negative 0.72%] real return US Treasury investors can currently expect on 5 Year Treasury Bills. The Nominal (quoted) Yield Curves and Real (Inflation adjusted) Yield Curves for two specific points in time, namely Friday 29 July 2011 and 30 July 2006 are listed below.
Yield Curve 1
What is interesting to note is the very flat nature of the Yield Curve for all T-Bills at the end of July 2006, at around a 5% Nominal Return for investors. Yet the most significant fact is that the Real Yield was around 2.37% on 5 Year Treasuries, versus today’s (0.72)% on 5 Year or (0.18)% 7 Year T-Bill yields. In order to generate a very small Real Return, you have to be looking at purchasing a 10 Year T-Bill to obtain a modest 0.38% Real Return in today’s market.
A cynic might make this remark:
“Not only do you pay your taxes, but with the negative Real Yields on both 5 & 7 Year T-Bills, you are paying the government to hold on to your cash too”
They win both ways!
theMarketSoul ©2011
Source Material: US Treasury web site:
Related articles
- How the Fed’s New Strategy Could Impact the Bond Market (blogs.wsj.com)
- Raymond James Weekly Bond Market Commentary (learnbonds.com)
- The U.S. Treasury Wants You to Buy This (fool.com)
The US Treasury Yield Curves – Are the markets really that bothered?
Image via Wikipedia
As a general introduction today we will look at two US Treasury Yield curves. The first Yield curve in the Curve graphic 1 below is the 3 Month bills compared to the 10 Year bills over the last 5 years.
In this table it is clear that the current 10 Year rate of 2.82% as of 29 July 2011, is still well below the 5 year average rate. The trend of the 3 Month bills, especially over the last few months has drifted aimlessly between 0.15% on 28 February 2011 and currently at 0.10% on 29 July 2011. There is in fact no noticeable concern in the Bond / Capital market over the potential technical US Treasury default on 2 August 2011.
The second curve below in Curve graphic 2 illustrates this fact of the 3 Month bills trend since 28 February 2011 to 29 July 2011. As can be observed, in the last few days a very slight spike has been observed, yet the rate at 0.10% is still below the 0.15% rate of 28 February 2011.
Yield Curve 2
In real monetary terms it is costing 5 Year Treasury bill holders (0.72%) (Yes a negative return of 0.72% currently to buy 5 Year Treasuries. (See US Treasury web site)
It will be interesting to observe and track the trends over the coming days, especially as we kick off August and Debt Ceiling D-Day in the US congress and Senate.
theMarketSoul ©2011
Source Material: US Treasury web site: http://www.treasury.gov/resource-center/Pages/default.aspx
Related articles
- The U.S. Treasury Wants You to Buy This (fool.com)
- The Fed’s Undistinguished Macro Discussions Circa Jan 2006 (wallstreetpit.com)
- Bill Gross Explains Why “We Are Witnessing The Death Of Abundance” And Why Gold Is Becoming The Default “Store Of Value” (zerohedge.com)
- Guest Post: Treasury Bears And Extinction Events (zerohedge.com)
- Another Debt Ceiling Debacle Before The Election? (outsidethebeltway.com)
- Bond Report: Treasurys stay down after 10-year auction (marketwatch.com)
- Daily Reads: Operation Twist Is Twisted, Gross A Treasury Bull? (learnbonds.com)
- PIMCO’s Bill Gross’ New Bet On Treasuries: Roll Down The Yield Curve (forbes.com)
A Storm in a ‘Tea’ cup
Never resist the temptation to start a discussion with a pun.
In our previous article we highlighted the ‘battle royal’ on Capitol Hill to get a proposal agreed to address the possibility of a US Treasury default, whether actual or technical on or after 2 August 2011.
So the Republicans could not muster together enough support on Thursday to ensure safe passage of the bill to the Senate, where it looks likely to be overturned or severely amended in any case.
There is obviously a lot of back room dealing going on over this and analysts in Europe (taking their beading eyes off the Greek and now Italian and Spanish dominoes) have started to pay attention to the goings on across the pond. We heard one commentator mention the fact that the USA’ reputation has already been affected by this, irrespective of the fact that a default occurs or not.
So there you go. The fringe minority floating in the ‘Tea’ cup with a lack of the ability to look over the brim of that particular cup, might in fact achieve their overall objective of raising their own profiles, albeit at the expense of the nation’s reputation and standing as a pillar of the international capital market.
Look, we are not choosing sides here, because at the heart of the matter is the fundamental principles of civil society versus the public sphere debate raging and continuing to rage in the USA.
In our next article we will highlight some of the basic differences in opinion and views on the size and influence of government in the USA versus Europe, via the Rahn curve analysis.
Until then, it is tick, tock; tick, tock whilst we await the vote and subsequent consequences and fall-out from the US debt ceiling debate.
theMarketSoul ©2011
united states currency seal - IMG_7366_web (Photo credit: kevindean)
Related articles
- RAHN: Obama has no Plan B – Washington Times (gds44.wordpress.com)
- In Blast From The Past, Debt Ceiling Could Be Investors’ Biggest Worry (blogs.wsj.com)
- Senate rejects attempt to prevent debt ceiling hike (cnn.com)
- Another Debt Ceiling Debacle Before The Election? (outsidethebeltway.com)
Hold your nerve!
It is a confidence thing.
We are so very, very close to seeing and experiencing another colossal collapse in confidence in the world’s financial system.
This time it is driven by the ‘US Debt Ceiling impasse’. A steady flight to gold has been taking place over the past few months and even though most informed commentators believe the US Treasury ‘default scenario’ is not likely to physically occur, the mere threat of a default has not yet managed to ‘focus the minds’ of the US congress house of representatives locked in an ideological battle over fundamental economic policy and direction.
Image via Wikipedia
At stake here is a scenario that will make the 2008 financial crisis wane into insignificance, should the threat of a US Treasuries default actually play out.
Yet, very few mainstream headlines outside of the United States have been published about this potential catastrophic event. And we are only a few days away from the edge of disaster (Default D-Day is chalked up for Tuesday 2 August 2011) and the Washington Post has a default clock ticking down on this deadline web site.
If a default actually occurs, confidence in the international capital and currency markets will have been breached and no serious commentator has yet fully quantified or effectively mapped out the potential consequences of this potentially disastrous collapse in capital market confidence.
The only significant contribution we can make at this publication is to cross our fingers, hold as much in cash and liquid (non US dollar) assets and hope that some real focus and a meeting of minds occurs before Tuesday 2 August 2011 on Capitol Hill.
theMarketSoul ©2011
Related articles
- The US Debt Ceiling Theater Is Back : Think The Issue Is On Autopilot? Think Again (zerohedge.com)
- A World Flying Blind (ritholtz.com)
- Here Comes The Treasury Floater (zerohedge.com)
- Explaining the gold standard, the Euro, Default, Deflation, and Hyperinflation (fabiusmaximus.wordpress.com)
- The Terminal Beginning Of The Western Financial World (seeker401.wordpress.com)
US Treasuries – Expanding the confidence time horizon
In our previous analysis piece on the Erosion of Confidence in the Capital Market, we discussed the downward trend in US T-Bill since 2006. In today’s brief analysis piece we have expanded the time horizon to the last 10 years from the beginning of 2001 to the end of the second quarter in 2011 (being June 2011). The view is each quarter end point for both 1 and 10 Year US T-Bills for this 10 year period.
What is interesting about both the 1month, 1 Year & 10 Year charts is the steady rise in rates (and economic confidence since the Iraq war in 2003 for both 1month and 1Year T-Bills). The Iraq war was declared on 19 March 2003 and this is the low point of the yield curves, followed by a steady rise in yield rates to their highest point (1 Year T-Bills) on 27 June and 18 July 2006 at 5.28% respectively.
The other point to note is the steady state of the 10 Year T-Bills between 2001 to 2006 bouncing around between 4% and 5% and then the steady erosion in returns since Q3 2006. As of 19 August 2011, 10Year T-Bills yielded a nominal 2.07% or a real (inflation adjusted) return of 0.02%.
The flight to more traditional bullion assets or other currency classes has been marked, with currencies such as the Swiss Franc, Canadian Dollar, Sterling Pound & Australian Dollar appreciating in value relative to the US Dollar as the flight to perceived safer haven assets classes and categories continue.
Our sister site (theVirtuousContinuum, launching on 26 August 2011) will have a more detailed briefing and analysis regarding the lack of Global coordinated Financial and Economic Leadership in order to stem the tide of confidence ebbing away in the global capital, commodities and wealth markets.
theMarketSoul ©2011
Source Material:
US Treasury web site at: http://www.treasury.gov
The source input data is available by clicking on this link
Rate this:
Share this:
Like this:
August 21, 2011 | Categories: Analysis, Economics, Free Market, Market Economy, Opinion | Tags: 2011, Analysis, Blogging, Blogs, Commentary, Economics, Economy, Free Market, FX, Market commentary, market confidence, Monetary Economics, Opinion, Political Economy, Synthesis, T-Bills, Thoughts, US T-Bills, us treasuries, US Treasury Yield Curves, Views, Yield Curves | 1 Comment »