Repost (damned applet) Would someone like to comment on the inversion thats happening in bonds?

greenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread

Thanks ahead of time.... Ed

-- Ed (eisvile@Hotmail.com), February 03, 2000 Answers You're welcome.

-- dinosaur (dinosaur@williams-net.com), February 03, 2000.

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I smell Fed shenanigans. This thing has Big Al's handwriting all over it. A little heavy handed though. See my comments in response to the metropole bond post below. For educational and resrch only:

Thursday February 3 4:30 PM ET U.S. Treasuries Spike Up in Wild Trading

Reuters Photo By Daniel Sternoff

NEW YORK (Reuters) - U.S. Treasury prices skyrocketed in frantic trade on Thursday as market players bailed out of trades that have been bleeding money ever since the government announced a plan to shrink the supply of debt.

The 30-year Treasury bond (US30YT-RR) surged an incredible three points higher at its session peak. Ten-year notes (US10YT-RR) leapt to an equally stunning 1-1/2 point peak and five-year notes (US5YT- RR) bounded more than a full point higher.

In late trading, the 30-year T-bond was up 1-20/32 at 99-25/32, sending the yield falling to 6.14 percent. 10-year notes were up 29/32 at 96-28/32, yielding 6.44 percent.

Thursday's shot came in the wake of similar gains on Wednesday, when the Treasury reiterated its buyback plans.

The Treasury's plan to reduce borrowing and buy back longer-term debt has turned the bond market on its head. Short- and medium-term paper are now offering better rates of return than long-term securities.

Bonds normally yield more than shorter-term debt, compensating investors for the longer-term risk that bond yields might fall behind inflation.

But over the past two weeks, 30-year bond yields have plunged more than half a percentage point to 6.16 percent after the government said it would buy back around $30 billion in longer term debt.

While long-term yields have been spiraling downward, the Federal Reserve is hiking short-term rates to ward off inflationary pressures in the booming U.S. economy. The topsy-turvy rate picture has sparked concern in some quarters that the bond market was diluting the inflation-fighting effect of the rate hikes.

``If the markets don't respond in the typical way, that would make the need for Fed restraint that much stronger,'' said Dana Johnson, head of research at Banc One Capital Markets.

Cheaper credit could stimulate borrowing in an already red-hot U.S. economy that has been powering ahead at a 5.8 percent growth rate -- far too fast for Fed comfort.

The distorted yield picture sent major financial institutions scrambling to adjust their portfolios.

``Debt is shrinking. There is a scarcity value,'' said Michael Gregory, senior economist at Lehman Brothers Inc.

Rapid price increases and extreme volatility were amplified by talk that some players' options and derivatives positions had soured. A wave of midday panic buying ensued as traders sought a safe haven in government securities.

``Anyone who has hedged mortgages, corporates or any kind of spread product with Treasuries is under a fair amount of water,'' said Brian Robinson, senior bond analyst at 4Cast Inc in New York.

``There is panic buying on the way up, but people see any selloff as an opportunity to get out at a better cost than earlier in the day. Spread product traders have made up their mind that they are getting out. It's just a matter of price,'' Robinson said.

``Honestly, I'm confused. What am I looking for? I'm going to try to still be employed tomorrow,'' said a trader at a U.S. bank in the midst of the buying frenzy.

The turmoil and rumors had many traders invoking the specter of the near-collapse of Long Term Capital Management, a hedge fund bailed out by a consortium of private banks in October 1998.

But speculation the Federal Reserve was arranging an emergency meeting with bond dealers to discuss bond market movements was quashed when New York Fed said such talk was ''completely unfounded''.

In late trading, five-year notes were up 19/32 at 97-13/32, to yield 6.51 percent, while two-year notes were up 3/32 at 99-22/32 to yield 6.54 percent.

Three-month bill rates fell four basis points to 5.46 percent, six- month bill rates dropped seven basis points to 5.59 percent, and year bill rates fell four basis points to 5.79 percent. A basis point is 1/100 of a percentage point.

Markets on Wednesday shrugged off the Fed's 25 basis point hike in two key interest rates. The increases were in line with Wall Street's expectations and many analysts expect further modest hikes in coming months.

Deputy Treasury Secretary Stuart Eizenstat on Thursday shrugged off criticism that the buyback plan had been mistimed, saying debt reduction in times of surplus was positive and would result in lower long-term interest rates.

Traders are looking to a key U.S. employment report on Friday for any fresh signs of price pressures, but some say supply distortions are reducing the impact of economic data.

-- Gordon (g_gecko_69@hotmail.com), February 03, 2000.

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-- Chuck, a night driver (rienzoo@en.com), February 03, 2000

Answers

In Galbraith's The Great Crash of 1929, one underlying theory was stocks had a scarcity value. The surge in leverage created true asset inflation - too much money chasing too little value. So, if we have a scarcity value in government debt today, I guess the government should print money with all haste to fill the void. If it looks like a gigantic short squeeze, smells like a gigantic short squeeze, you don't need to see the body bags to know it is an institutional sized squeeze. With the leverage available in the government marketplace, this squeeze could be rather nasty. It is one thing to see a short squeeze in an individual stock, but this is one of the most amazing financial events since 1987.

The amount of money caught in this squeeze could make LTCM look like a non-event. But, this stock market has rallied from the grave more times than I ever thought possible. But, Galbreath points out 1873, 1907, and 1920 were years of crashes and the market rallied to new highs thereafter. Guess when it comes to markets, just when you think you have seen it all - you get a 30 year bond from the Twilight Zone. I'm sure someone much smarter than I will have the Final Answer, maybe Regis knows.

-- al bundy (peaked@18.com), February 03, 2000.

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Ed, What Mr. gecko's article strongly implies is that some very large players have placed some very big bets on long bond prices dropping, and they are on the losing side of that bet in a big way. As a consequence they are rushing to cover their bet by buying long bonds at any price. This surge of buying is so pronounced that it has driven long bond yields below the yields for shorter duration instruments.

As the yield curve warps more strongly toward this inversion, the pressure on the "shorts" will only increase. Eventually, we may see some big traders or banks announce that they have been bled dry by this squeeze. If the yield curve reverts to normal soon, it may be a blip. But if it stays inverted and warps further, someone is in a world of hurt.

-- Brian McLaughlin (brianm@ims.com), February 03, 2000.

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Plunge in US bond yields seen causing domino effect By Andrew Priest NEW YORK (Reuters) - A plunge in 30-year Treasury bond yields, which accelerated Thursday, will send ripples well beyond the $3.2 trillion U.S. debt market as these bonds play a key role in pricing other securities, analysts said.

Despite a quarter-point hike in U.S. interest rates by the Federal Reserve on Wednesday, the price of 30-year bonds surged as much as three points higher in frantic Thursday morning trade.

This sent the bond's yield, which moves in the opposite direction to price, plunging to its lowest level of the year. At one point, the bond yielded less than the one-year Treasury bill, a highly unusual event.

As a sign of the current turbulence in U.S. financial markets, the premium charged in bond markets to lower-rated borrowers -- the 10- year dollar swap spread -- continued to balloon.

Spreads are now approaching levels unseen since September 1999 when they were at around 114 basis points -- 1.14 percentage points -- amid jitters over U.S. stocks, the dollar and concerns about a possible liquidity crunch ahead of the Y2K computer problem.

This week's sudden fall in bond yields was prompted by concern over future supply in the wake of a Treasury plan to cut issuance and buy back some $30 billion in longer-dated issues. Investors who had bet on more settled times have suffered heavy losses, traders and analysts said.

Most of these losing trades had bet late last year that 30-year yields would stay above those on shorter maturities, traders said. But 30-year bonds now yield less than 10-, five and two-year notes and 10-year notes yield less than their two- and five- year equivalents.

But the problems for investors are likely to multiply, as the recent turmoil in bond markets will require other positions to be adjusted to account for the shape of the new yield curve, analysts said.

``The problems began with yield-curve steepening trades but are now affecting other trades such as certain option trades which were based on 30-year bonds continuing to trade in a tight range with all the risk to the downside,'' said Holly Liss, vice president at Fuji Futures Inc. in Chicago.

She said some investors were rumored to be liquidating even profitable trades, including bets on the movements of major currencies like the dollar and the Japanese yen, in order to raise cash to balance their losses in bond markets.

``As we found out with Long-Term Capital Management (LTCM) these things can go a lot further than people at first expect,'' she added.

Hedge fund LTCM was bailed out by a group of private sector banks in October, 1998 after its highly leveraged bets on global interest rates went sour following the Russian economic collapse

News of trouble at LTCM, which traded billions of dollars globally, sparked massive upheaval in international financial markets already roiled by Russia's financial and economic crisis.

``There are a lot of fixed-income assets which are benchmarked to the Treasury curve including all kinds of mortgage portfolios and other spread products like corporate bonds,'' said Jon Jacobs, fixed income analyst at IDEAglobal.com.

``A violent move in the yield curve creates a lot of stress on a wide variety of bank and investor positions like the sudden jolt up in interest rates in 1994 which caused all sorts of derivative blowups. It's not inconceivable that something similar could happen again,'' he said.

``I would keep a strong eye out for reports of distressed trades which are not necessarily direct yield curve spreads. Even someone with no Treasuries in his portfolio could still be forced into stress by something like this if he's benchmarked or risk modeled against a computed Treasury curve,'' he added.

So frantic was trading on Thursday that rumors swirled around the debt markets, at times citing problems at virtually every major U.S. investment house as well as a number of hedge funds and even one European insurance company.

Though no firm reported problems Thursday, analysts said the huge price swings over the past week will require significant portfolio adjustments.

Computer models, widely used by modern-day investors and banks, typically use Treasury yields as a reference rate by which they can price other market instruments and determine their market positions.

Big changes in the shape of the Treasury yield curve can therefore produce big changes in the theoretical valuation of a wide variety of other instruments and cause heavy volatility as investors adjust their market bets.

As a sign of this volatility, the 10-year dollar swap spread widened to around 102 basis points on Thursday from around 70 basis points a week ago. The swap spread measures the additional cost of borrowing for a AA-rated borrower compared with a U.S. 10-year Treasury note.

Spreads are a good indicator of the appetite among investors to hold so-called ``spread'' products in their portfolios. Spread products include mortgage-backed securities, asset-backed securities and corporate bonds. Higher spreads indicate a preference for government paper.

-- Jackson Brown (Jackson_Brown@deja.com), February 03, 2000.



-- Chuck, a night driver (rienzoo@en.com), February 03, 2000.


Will this inversion squeeze be the trigger which pricks bubble.com?

-- dinosaur (dinosaur@williams-net.com), February 03, 2000.

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That's my question too, Dino.

-- number six (#@#.com), February 03, 2000.

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30 year bonds are rising in value (lower interest reates) because: 1) scarcity of supply: the Treasury will be issueing less of them. 2) Increased demand: The Treasury will be buying long bonds with the "budget surplus." 3) Nobody "invests" in long bonds, they are trading vehicles. could be a short squeeze.

-- nobody (nobody@nowhere.com), February 03, 2000.

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-- Chuck, a night driver (rienzoo@en.com), February 03, 2000.


Just a hunch but scenario appears to be as follows:

1. FED raises rates to fight inflation.

2. Japan dumps US Treasuries due to higher rate and liklihood of further erosion of value in future. Japan unveils plans to issue US Trillions of dollars of Japanes Yen based debt replacing IMHO the US T-Bill holdings of Japanese households.

3. US Treasury is buyer of long bond to avert collapse of US debt market and dollar. Had Japan dumped US bonds and no one purchased them the bond would have fallen and interest rates for future US financing would go thru the roof.

4. This is still inflationary as the rapidity of action surprised the major players and they were caught in the wrong position with the investment strategies.

5. The effect is now the US treasury has monetized our debt by replacing the longbonds with greenbacks which reduces the value of the dollar and lead to INFLATION.

Anyone want to sell their Y2K gold or silver?

-- Bill P (porterwn@one.net), February 03, 2000.


Thank you Chuck.


-- Possible Impact (posim@hotmail.com), February 03, 2000.

http://www.bloomberg.com/markets/C13.html?sidenav=front

U.S. Treasuries

-- (Watching@the.market), February 04, 2000.



Bill P:

You might be right. What interesting times we live in.

-- tim phronesia (phronesia@webtv.net), February 04, 2000.


Could bonds prick the stocks bubble? Absolutely, yes. Historically, crashes in bond markets preceed stock market crashes. There is far more investment capital tied up in the bond market than in equities at any given point in time. The bond:stock ratio has rather consistently hung around 23:1 (23 bonds for every 1 share of stock) in recent years. With a ratio like that, trouble in the bonds could easily cause stocks to crash. The current problem in the bonds suggests that stocks are, in spite of the rally so far today and yesterday, in far more trouble than they know.

-- (cashtradr@aol.com), February 04, 2000.

When we think 'bonds' don't stop with the bonds themselves. Look at all the 'bets' called derivatives which actually dwarf this market by a factor of 30 to 1. Derivatives have been seen as a means of reducing risk. The problem is that they are built on models which do not take into account swings of volatility 10 times what were assumed possible. We are seeing swings of this kind now. The result is 'panic' because the machines are telling the humans that the derivative contracts are killing them 3000% worse than the market moves. We are seeing swings on 100 basis points on a day of trading in US Gov securities...which is totally unheard of, except in third world debt instruments.

Garranteed that we are seeing the hemoraging of a huge market which makes the stock markets of the world look like a a chicken drumstick. The banks are toast. BTW crude oil & oil products price volatility started this pandemic. Caused by embedded systems issues. It is indeed a domino kind of situation.

-- ..- (dit@dot.dash), February 04, 2000.


The warning signs have been posted. Proceed with caution...

-- dinosaur (dinosaur@williams-net.com), February 04, 2000.

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