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  • Congestion

    Posted by Jonathan on March 27th, 2017 (All posts by )

    June 2017 T-Bond Futures (Daily)

    Multiple choice bond quiz:

    1) The fix is in.

    2) The longer this continues, the higher the odds of a big move, probably lower in price, after one of the next breakouts.

    3) Both 1 and 2.

     

    7 Responses to “Congestion”

    1. Phil Ossiferz Stone Says:

      Nobody knows what the F you’re talking about, Jon. Elucidate a little?

    2. Grurray Says:

      I would like to take door number 2, but all of the sudden there is a lot of uncertainty.

      Kicking the debt ceiling can down the road has pushed down yields

      http://www.zerohedge.com/news/2017-03-17/debt-ceiling-deadline-has-passed-now-biggest-test-donald-trumps-presidency-begins

      According to independent analyst estimates, we have until the 3rd quarter before the government defaults

      https://bipartisanpolicy.org/press-release/debt-limit-x-date-likely-in-october-november/

      The problems we saw with the healthcare bill will surface again, probably even worse, with the debt ceiling. There’s a rigid faction reluctant to compromise. The way out may be to combine raising the ceiling with drastic budget cuts, but that will be tricky with the Fed tightening. So now the Fed is getting wishy-washy.

      We need tax cuts as soon as possible, like yesterday. It should have been top priority over healthcare.

    3. PenGun Says:

      Goldman Sachs gives 3 options.

      Short something if you have it well planed, the Bear option.

      Just hang tight as they see a short melt up. The hang tight option.

      And get the f&*k out and wait a bit to start over. The sensible option, but not everyone can do this.

      I dunno I just see this stuff in my wanderings.

    4. Gurray Says:

      Phil,

      The chart is for the 30 year treasury bond futures contract. With bonds, price moves inversely to interest rate. As this chart shows, price has gone up recently, and the rate on the 30 year has correspondingly gone down. Although, today bonds are selling off nicely.

      A couple weeks ago, the Fed raised rates short term interest rates as part of its plan to tighten up the credit markets, so the short term rate is rising.

      If we had true free markets then rates for all bonds regardless of duration would tend toward the same level. Any differences in rates would be caused by differences in time horizons of entrepreneurs and investors. The markets would freely find a dynamic equilibrium amidst capital flows as businesses expand and contract, like a complex system adapting to stress and change. Of course, as long as the stress isn’t too bad.

      The recent central bank manipulation, on the other hand, is designed to have the rates rise as the terms get longer. According to their mechanistic view of the universe, the Fed’s rate increase would gently percolate throughout the bond markets, rates sloping ever so nicely up, up, up and away, as all the little automatons react accordingly in lock step. Market expectations have caused some deviations from the plans, however.

      If the mismatch goes on it could turn into a situation where long term rates drop lower than short term rates. This is an inverted yield curve, and it has been a good indicator of recessions (price below the zero line):

      https://fred.stlouisfed.org/graph/?g=daAC

      To Jonathan’s point, every now and then the bond market wakes up and takes the reins from the Fed. Usually what happens is the Fed starts dipping its toes in the water, splish-splashing about a bit, then the Bond Vigilantes cannonball in the pool KerSplaT. It happened that way in 1994, in the ’80s, and a few other times.

      In 2013 it was a little different. Bonds sold off because of the QE taper (the ‘Taper Tantrum’). QE seemed to give the Fed an edge over the bond market, but it remains an unpredictable wildcard. The Fed did taper purchases but still holds a boatload of mortgage backed securities

      https://fred.stlouisfed.org/series/MBST

      What they do with all of that paper is an ongoing concern.

    5. dearieme Says:

      Anything that’s “selling off nicely” must also be “buying up nicely” too, mustn’t it?

    6. Grurray Says:

      That’s right Dearie, there are two sides to every trade, although the issue with that might be getting those two sides together. With all the computerized trading and central market manipulation nowadays, everybody tends to want to move to one side of the boat or the other.

    7. Phil Ossiferz Stone Says:

      Thanks Gru. That’s the information that should have gone in the original post.