Tag Archives: treasury bonds

Add mortgages to the debt bubble (with junk bonds, munis, sovereign debt…)

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Mortgages are still cheap, if you can get them. The spread over 30-year T-bonds has fallen to record lows, at just 0.2%.

St. Louis Fed

This spread is unsustainable and will be corrected by falling bond yields (rising prices) and/or rising mortgage rates. It is possible that mortgage rates fall still lower, but the spread must widen to deliver a decent risk premium (the same is true for corporate bonds). I actually would not discount the odds of yet lower mortgage rates if Treasuries rally hard, since we are going through deflation (best defined as a contraction of money and credit) and the real yield is a good deal higher than the nominal.

Lookat CPI minus food and energy (it is mainly higher oil and gas prices over the last 12 months that are holding it up):

David Rosenberg calls mortgages a bubble:

Once again, this Houdini recovery has involved a situation where mortgage rates have plunged and yet Treasury bond yields have been rising — 30-year fixed rate mortgages have fallen to 4.93% and are sitting are record-tight spreads over long Treasury bonds (see Chart 6). Historically, the average spread is 150bps and this differential is now 20bps. This is remarkable and our concern is that investors who may be exposed to mortgages are at serious risk because there is a considerable chance that these rates will be moving higher over the intermediate term — notwithstanding continued support from Uncle Sam’s pocketbook.

Investors must be reminded time and again that mortgages are callable, Treasuries are not; and we are now in a situation where net of fees, which average 70bps, anyone buying mortgage paper today is receiving a rate that is less than what the borrower is paying, How nutty is that? Remember — despite all the ridiculous comparisons to the Weimar Republic, the long bond is THE risk-free benchmark interest rate in the U.S. and with State taxes going up, Treasuries are an even further bargain because of their tax status.

Houses are still way too expensive in the US, as indicated by inventories, income multiples and rental yields, but if they fall to historically cheap levels in the coming years while mortgage rates stay low, they could be a fantastic investment. This is especially true if we later go through a period of high inflation, so that real mortgage payments drop (fixed-rate only of course) while rents and incomes rise.

This goes to show the importance of keeping hold of your cash during deflation, because there will be historic opportunities in almost every asset class.

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More here from David Rosenberg (free account required).

PPS – Here’s an update on the long Treasury note, short junk bond play. As you can see, we are still in a very nice spot to put on the trade:

SPX ready to rebound? (updated after the close)

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We nearly have an upward cross on the 30-min RSI:

prophet.net

UPDATE: Of course, the other alternative is that each little bounce gets sold and the oversold condition lasts for another day or so and takes us down another 1-2%, as in the decline from 1100 in early February. The easy answer to this problem is to keep ratcheting down your stops or set a loose trailing stop.

UPDATE 6:20: Well, we got a bit of a bounce in the afternoon, then a sell-off into the close, followed by a rebound in the futures after-hours. If this were like January, we might gap up tomorrow and rally to challenge the highs, but RSI is looking a lot weaker and lots of other markets are acting bearish. Bonds in particular had a very strong day and did not give back any of their rally:

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On the 30-day view of SPX, you can see that RSI is deteriorating faster than in January, so perhaps any correction of today’s drop doesn’t challenge the highs:

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If indeed this is intermediate wave 3 (of minor 1 of primary 3), as a third wave, we shouldn’t expect much in the way of countertrend action.

Another good week for bond spreads

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Bonds are a key indicator of the health of the risk trade. So long as treasuries are shunned and junk is bid, it is likely that stocks and the commodity complex hold up. This week, long-dated Treasuries have gained a couple more points as junk bonds continued to lose their mojo:

Source: google finance

Here are the same ETFs going back to the start of the bear market in stocks. You can see that despite a huge correction in 2009, treasuries are still over 20% ahead of junk:

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The collapse of the long bond has been eagerly awaited since 2007, and TBT (the 2X short bond fund) is still often mentioned in online chatter. The crowd is almost never right about these things, so I suspect that T-bonds will remain strong for the next leg down in stocks.

2008 was just been the “first look” at what can happen in the aftermath of a debt bubble — why couldn’t the same price action continue as risk in priced in again? Even if 2008 turns out to have been the “Prechter point” of greatest recognition and panic (and not what is coming), I doubt that many final price extremes were set last year.

For the yeild on the long bond, at the very least I expect another dip into the sub-3.5% area (it’s 4.5% now, and it touched 2.5% a year ago). Then we can talk about setting up long-term short positions for a secular (15-30 year) bear market.

At any rate, if think yields are going up from here, you’ve got much better odds with shorting corporate or municipal bonds, since those things are priced for perfection and defaults are going to be rampant. Even if treasury yields stay flat or go up, weak credit should collapse.

Oh, and if you just can’t wait to short long-dated sovereign debt, how about Japan at 2%? Or Greece at 6%? Or Spain, Italy, Ireland… all of this stuff is in trouble. Why pick the senior currency?

That should about do it.

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We haven’t seen this kind of bullishness on stocks since 2007. Pullbacks at every degree since the March lows have been shallow.  Volume and implied volatility have dwindled, and this month the put/call ratio has plunged while trader sentiment surveys have shot through the roof and levitated for three weeks. Tim Knight noted today that he had never seen the comment board on his blog so bullish, and those are hard-core bears. Dollar bearishness remains very high, while new lows have not been forthcoming. Treasury bonds are firm, having rallied off extremely low sentiment. China’s wave 2 bubble has apparently started to burst. Mortgage delinquencies and foreclosures are rising. The FDIC just became technically bankrupt. Bernanke is basking in his “success.”

Any further gains are going to be borrowed at steep interest, and we shouldn’t have to wait much longer for some fireworks.

Here’s the 5-day put/call vs. the S&P:

Indexindicators.com

Here’s the 20-day average and 3-year view:

This is it: we have a major top this week.

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Frequent readers know that I watch sentiment and put a lot of stock in Investor’s Intelligence and Daily Sentiment Index surveys, and that when extremes in sentiment match with extremes in price, it is as good a trade as the market ever provides. Well, we have 3% dollar bulls today. The dollar is going to blast off from here and kill the stock and commodity rally and blow credit spreads wide open. It also appears that emerging market (including Chinese) stocks have already started stair-stepping lower.

The dollar vs. the euro, pound, Aussie and Loonie — a loaded springboard:

Chart from Yahoo!

I see three clear waves up from March in stocks and commodities (three is what you need for a complete countertrend move), with big B-wave moves down in the dollar and bonds, which now have the potential to blow right through their highs from last winter’s deflation trade. In stocks and commodities, the sell-off into early July was the b-wave (of 2 of C), where the hobby bears jumped in, and the rally since has crushed all but the most disciplined, patient and deep-pocketed shorts. On the cusp of the big 3rd wave down, this is definitely not the time to lose religion.

Commodities’ last gasp (indexes here):

Credit: Bloomberg.

Watch for VIX liftoff as well to add extra oomph to put portfolios.

Yahoo!

I’m sitting on puts on oil, silver, stocks, the euro and pound and calls on Treasuries. There are no guarantees in the market, so anything could happen, but I’ve never felt better being short (my puts are comfortably long-dated, of course). A sharp pullback might set us up for new highs, though I doubt it. I’m expecting a typical rollover at first, with increasingly jagged price movements (remember when almost every day saw 3% swings?), but not necessarily full-on crash conditions for several weeks to months.

Don’t trade like me (I’m a wild man), and good luck out there.

Addendum:

Here’s the much mentioned analogue to the ’29-’30 post-crash rally (image from D. Rosenberg at Gluskin Sheff — sign up for his free letters here):

Treasuries could have a lot of strength left.

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Take a look at this spike in the long bond yield in late 1979 and early 1980 (charts from Yahoo! Finance):

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It must have been a real shocker at the time, and when yields returned to near pre-spike levels, it must have seemed as though the event were an anomaly. Well, it was part of a generational bottoming process for bonds that lasted a few more years:

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Now take a look at recent history:

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I’m just sayin’…

Ron Paul sums up the crisis in 3 minutes

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(thanks again to zerohedge for finding this video)

I remember when I first discovered a speech by Ron Paul back in boom-time 2005, and was shocked that a Congressman was so eloquently warning of the dangers of fractional reserve lending, the Federal Reserve system, and welfare/warfare deficit spending. It was the first time that I could fully respect a standing politician.

Dr. Paul is still the nation’s strongest voice for an honest monetary and banking system, and he delivered a zinger in front of Bernanke and Frank yesterday. If, like me, you haven’t heard him speak in a while, have a listen and you’ll remember why his campaign was so exciting for so many of us.

Money quote: “I would suggest that the problems we have faced so far are nothing compared to what it will be like when the world not only rejects our debt, but our dollar as well. That’s when we’ll witness political turmoil that will be to no one’s benefit.”

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Now wouldn’t it be great to have Peter Schiff to cause the same trouble in the Senate?

Key markets pushing resistance levels

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US equities, the VIX, oil and copper are bucking against price levels associated with multiple peaks and troughs over the last month. The levels are as follows:

July copper: resistance at $2.32 – 2.35

August oil: resistance at $70 – 71 (BTW, I have been stopped out here and am on the sidelines)

NASDAQ futures (NQ): resistance at 1470-1480

S&P 500 futures (ES): resistance at 915 – 925

VIX: support at 27

These markets are looking short-term toppy, but a push through here would be bullish. Every time the VIX has dropped to 27 it has snapped back up, oscillating around the 30 level for the past 5 weeks. Today’s action should go a long way towards relieving the oversold condition (OTM put spreads, low TICK) that we observed earlier this week).

Divergent action today

It is noteable that bonds are holding onto very nice gains and even pushing higher today, that the dollar is well off its lows, and that precious metals are languishing. We have an unresolved market here. I believe that the bond market is generally the most prescient, so unless treasuries get on board and sell off hard, I’m holding onto most of my reflation-trade shorts with relatively tight stops (with the exception of the CHF short — yesterday’s crash on manipulation news provided a nice exit — I’ll reenter if we get a bounce, as with GBP).

Buy bonds!

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It’s patriotic. No, seriously, I really like the 10-year note here. Today’s much talked about auction had the highest bid to cover ratio of any since mid-2007 according to Bloomberg, with plenty of interest from overseas investors. 4% is a pretty darned good yield considering that Case-Shiller CPI is running at negative 5%. 9% is a good yield in any security, let alone Treasuries in a depression.

Technically, I like this chart. Yields have now corrected the overshoot to the downside that we saw in December, but have not broken out so far that you could say the Treasury bull market is over:

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I don’t know what inflation will be 10 years from now, or even the stability of the world’s fiat currency regime, but from a trading point of view, I suspect that dollar and inflation fears have run their course for this round. Traders seem to have forgotten that for the growing ranks of individuals who have lost their jobs but not their debt, or for businesses experiencing month after month of losses, cash is most definitely not trash.

As I said last Friday, I think we are at a turning point where various assets are peaking or bottoming more or less in synch. Gold, silver, the euro and pound may have printed their highs last week, while we are still waiting for oil and bonds to make a reversal. If all of these assets do actually turn, I would be highly surprised if the equities markets didn’t follow suit.