"The surprising resilience of Treasuries has investors re-calibrating forecasts for higher borrowing costs as lackluster job growth and emerging-market turmoil push yields toward 2014 lows. That’s also made the business of trading bonds, once more predictable for dealers when the Fed was buying trillions of dollars of debt to spur the economy, less profitable as new rules limit the risks they can take with their own money."Shouldn't be "surprising" unless you don't understand the operations. Didn't anyone learn from Japan?
"While they’ve ratcheted down their forecasts this year, they predict 10-year yields will increase to 3.36 percent by the end of December. That’s more than 0.6 percentage point higher than where yields are today."“My forecast is 4 percent,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank AG, a primary dealer. “It may seem like it’s really aggressive but it’s really not.”4%? Uh, ok good luck with that one.
Seems like Matt Franko's prior analysis, that bond dealers hate the low rates and want to push for higher ones, is correct.
"The biggest dealers are seeing their earnings suffer. In the first quarter, five of the six biggest Wall Street firms reported declines in fixed-income trading revenue.New York-based JPMorgan, the biggest U.S. bond underwriter, had a 21 percent decrease from its fixed-income trading business, more than estimates from Moshe Orenbuch, an analyst at Credit Suisse, and Matt Burnell of Wells Fargo & Co. Citigroup, whose bond-trading results marred the New York-based bank’s two prior quarterly earnings, reported a 18 percent decrease in revenue from that business. Credit Suisse, the second-largest Swiss bank, had a 25 percent drop as income from rates and emerging-markets businesses fell. "Sadly the article makes no distinction between the nature of US government paper and corporate paper. Any further thoughts?
Yields on 10 year Spanish Bonds are now equivalent to yields on 10 year Tsys.
ReplyDeleteAll this impressive fall in yields on securities issued by a non- sovereign is apparently a consequence of a mere promise by the ECB to do whatever it takes (in the guise of OMTs) to support the periphery of the euro zone.
This shows how powerful central banks can be. If tomorrow the ECB were to make a similar promise to private sector bonds (and it's quite possible it will engage in a form of QE mainly directed at private sector securities) then the risk premium on such securities may simply disappear.
It does seem that the difference between sovereign and non-sovereign issuers depends on something as simple as credible promises of support from the central bank. The distinction is less clear than one previously thought. Maybe MMT should formally take this quite surprising evolution into account.
Mr. Gatekeeper, can "operations" explain why yields rose to >2% in the first place? If not, then I call "broken clock".
ReplyDelete"Seems like Matt Franko's prior analysis, that bond dealers hate the low rates and want to push for higher ones, is correct. "
ReplyDeleteYes it is...... and of course this belies the whole idea that there really are bond vigilantes that can punish the treasury market.
To believe in these vigilantes you would have to believe that that they have been "happy" with the yields that they have been getting the last 6-7 years. These vigilantes would have to be viewed as being in an altruistic mood the last few years.
These drivers of capitalism have been acting socialist of their own volition the last few years?
Vigilantes power is only in being able to persuade the fed to change policies not in using market forces.
It's amazing how a mere proclamation from a central bank can change the markets, without doing even one purchase. It seems like private dealers are happy to act as the central banks 'agents', knowing that they can unload their securities to the CB at any time...
ReplyDeleteIts amazing how quickly the "vigilantes" seem to disappear as soon as the ECB declares a backstop policy!
"Yields on 10 year Spanish Bonds are now equivalent to yields on 10 year Tsys."
ReplyDeleteGoes to show you how low the Fed is currently setting the prices in the UST market...
Justin wait until the Fed gets out of the market and you'll get your "Japan" imo... current quote 0.605% on the Japanese 10 yr....
these people who think if the Fed just ends the QE else equal and then rates are simply going to go up are going to probably lose some funds imo... I wish it were that easy but it never works that way... this is setting up just like the "who's going to buy them now" rally from a couple of years ago...
rsp,
Excellent post and discussion (for someone with my interests).
ReplyDeleteHeadline today at MarketWatch: 100% of economists think yields will rise within six months. I think they're wrong. The Fed is tapering, not because the economy is overheating, but to give itself room for more QE if necessary. Disinflationary trends continue, except for luxury goods. The growing inequality contributes to financial instability which will be addressed by more QE at some point.
As others have noted, the experience in Japan is relevant to what we can expect here...
One interesting feature of the ECB's methodology is that they merely "announced the possibility of conducting outright open market operations in secondary sovereign bond markets". They never really had to do anything.
ReplyDeleteUntil the present - and apart from a short period at the height of the euro crisis (May 2010 to February 2012) - the ECB never bought government secutities in the secondary markets.
This is all very different from the operating mechanisms of the Fed. There are no OMOs in Europe - yet a verbal promise by the central bank was credible enough to be believed by the "vigilantes" and bring yields on debt issued ny non sovereigns down to levels comparable to the U.S. or the UK.
And there's more: the ECB is now considering the possibility of doing for private sector securities what it never did for public debt: buy massive amounts of those securities in the secondary markets both to relieve commercial banks' balance sheets and (supposedly) ease credit conditions for the private sector.
This kind of behavior neatly corresponds to the definition of a central bank as an open and unashamed promoter of private interests.
And - sadly - no one dares to protest against this usurpation, in the whole of the eurozone.
Compared to this situation, the Fed - faced with the regular exposition of its chairperson to uncomfortable questioning in regular Congressional sessions - almost seems like a model of democratic accountability.
The 4% target is aggressive; he probably has not looked at what the forwards would imply. At the end of the year, there is no plausible scenario where the Fed has started to hike rates. (It could happen, it's just not plausible now.) Since the Fed would follow its previous policy of hiking 25 bps per meeting, it will take 2 years for the policy rate to hit 4%. Unless he thinks the terminal rate is going to be 5%, or there is going to be a massive term premium, it's hard to get the average policy rate to be 4%.
ReplyDeleteBut I wil respond to the comment in your article here - there is no reason for Wall Street to view Treasury trading different from any other type of bond trading. They do not hold bonds they think are going to default in inventory willingly. Although they are traded on a different desk, and with different market conventions, the business looks similar (although margins are smaller). The difference between corporates and governments matters more for analysts or buy side asset allocators.
Jose here in the US though our Fed is doing things in the marketplace, ie running down the bond prices "to get a good deal for the taxpayers..."
ReplyDeletemarris, they went above 2% when the US hit the 'debt ceiling' last May and didnt net issue $1 of USTs until after the "shutdown" at the end of October... the Fed was buying like $40B per month over this time and dominated the market and drove prices down to where they are here in this range where yields are in the high 2%....
Wait till they stop the QE and it rallies the Fed will probably then sell and "make a fortune for the taxpayers" and return the profits to Treasury to "balance the budget" and all these morons will then give themselves national achievement awards or something...
rsp,
"As others have noted, the experience in Japan is relevant to what we can expect here..."
ReplyDeleteHere's a line i borrowed from Warren Mosler....
08/05/11 US economic path more like Japan than Greece, Rombach says…. http://reut.rs/qWH59r
@Matt If the qty supplied fell and demand did not fall, then wouldn't prices rise?
ReplyDelete