Treasuries

[DrunkenSailor]

3 year is now priced higher than the 10 year after this mornings fun. Things are gonna get interesting.... we are past death cross.

Bond pricing on non qm securitizations does not work. Spreads have widened past 170 and excess coupon to pay the bonds off is under 50bps without modeling discount rates to future cash flows and default rates. Liquidity is drying up quickly.

Agency is having a tough time selling bonds at umbs 4.0. the fed misjudged the demand for agency bonds and stopped buying at a time when the market is demanding more yield than the market has available. Every originator needs to raise rates but it takes 45 days for pipelines to catch up. Easy enough in a stable environment. But the target over the past two months is moving too quickly and no one can get to the level they need to be because the number is double what it was 3 weeks ago.

Powell keeps talking this morning and the market keeps reacting worse.

 

[OldSchoolBoats]

3 year is now priced higher than the 10 year after this mornings fun. Things are gonna get interesting.... we are past death cross.

Bond pricing on non qm securitizations does not work. Spreads have widened past 170 and excess coupon to pay the bonds off is under 50bps without modeling discount rates to future cash flows and default rates. Liquidity is drying up quickly.

Agency is having a tough time selling bonds at umbs 4.0. the fed misjudged the demand for agency bonds and stopped buying at a time when the market is demanding more yield than the market has available. Every originator needs to raise rates but it takes 45 days for pipelines to catch up. Easy enough in a stable environment. But the target over the past two months is moving too quickly and no one can get to the level they need to be because the number is double what it was 3 weeks ago.

Powell keeps talking this morning and the market keeps reacting worse.

3's, 5's and 7's are all priced higher now. This move in treasuries and MBS is much bigger than the 2013 Taper Tantrum.

 

[lbhsbz]

Can someone put this english please?

 

[caribbean20]

Can someone put this english please?

It’s called a “flat yield curve.” Flat or inverted yield curve, meaning longer dated maturity bonds have a lower interest rate than shorter dated maturity bonds, generally means a recession is coming.

 

[Ace in the Hole]

It’s called a “flat yield curve.” Flat or inverted yield curve, meaning longer dated maturity bonds have a lower interest rate than shorter dated maturity bonds, generally means a recession is coming.

Absolutely means one is coming...just a matter of how much wasteful spending and corp/bank bailouts the .gov saddles us with "trying to prevent it". Buckle up.

 

[caribbean20]

Absolutely means one is coming...just a matter of how much wasteful spending and corp/bank bailouts the .gov saddles us with "trying to prevent it". Buckle up.

Agreed. Last I recall, recessions are all part of the economic cycle in capitalism. Silly for politicians to think they can forestall it. It’s when the weak hands get weeded out to ensure capital goes to the most productive places.

As the old saying goes, “bear markets are when money goes back to its rightful owners.” Or something like that.

 

[Ace in the Hole]

Agreed. Last I recall, recessions are all part of the economic cycle in capitalism. Silly for politicians to think they can forestall it. It’s when the weak hands get weeded out to ensure capital goes to the most productive places.

As the old saying goes, “bear markets are when money goes back to its rightful owners.” Or something like that.

When the government chains the "invisible hand" bad things happen.... This entire economy is so fucked up with government intervention that historical models make no sense.

 

[MSum661]

Absolutely means one is coming...just a matter of how much wasteful spending and corp/bank bailouts the .gov saddles us with "trying to prevent it". Buckle up.

CPI Inflation now at 7.9% and the FEDs first rate hike since 2018 of only 0.25%.
Technically speaking to combat the current 7.9% CPI the FED should have its benchmark rate somewhere in the ball park of 4-5%, not 0.25%.
Really puts it in perspective how badly far behind the curve the FED is right now.
Like you said....buckle up

 

[caribbean20]

CPI Inflation now at 7.9% and the FEDs first rate hike since 2018 of only 0.25%.
Technically speaking to combat the current 7.9% CPI the FED should have its benchmark rate somewhere in the ball park of 4-5%, not 0.25%.
Really puts it in perspective how badly far behind the curve the FED is right now.
Like you said....buckle up

and let’s not forget the FED has to start unwinding their balance sheet at the same time. Higher interest rates AND the FED not only tapering, but having to sell their bond purchases means a strong headwind.

 

[MSum661]

and let’s not forget the FED has to start unwinding their balance sheet at the same time. Higher interest rates AND the FED not only tapering, but having to sell their bond purchases means a strong headwind.

Yes Sir! The unwinding of the FEDs 9 years of relentless QE is the killer.

 

[c_land]

CPI Inflation now at 7.9% and the FEDs first rate hike since 2018 of only 0.25%.
Technically speaking to combat the current 7.9% CPI the FED should have its benchmark rate somewhere in the ball park of 4-5%, not 0.25%.
Really puts it in perspective how badly far behind the curve the FED is right now.
Like you said....buckle up

If you use the taylor rule the Fed Funds Rate should be just over 9%!

https://www.yardeni.com/pub/taylorrule.pdf

 

[MSum661]

If you use the taylor rule the Fed Funds Rate should be just over 9%!

View attachment 1098457
https://www.yardeni.com/pub/taylorrule.pdf

But a real rate of that magnitude, at 9%, would be considered unimaginable to the current markets.
Unimaginable!

 

[MohavValley]

Govt/ Fed has distorted markets so bad I really don't think anybody can predict what's going to happen especially because govts are going to try to step in and save it at just about any cost once it starts to go.

 

[2Driver]

Keep in mind when interest rates are due to go up in the near future investors tend to shy away from longer term bonds hence their yield will be lower. People will gravitate to lower duration bonds and those yields will move up.

Also the US government owns 25% of its own debt which are the longer term bonds. That purchasing demand by the fed helped to keep those longer duration yields low too. I’m not sure the the inversion has as much meaning right now as it would normally.

Once the Government starts selling its holdings of US bonds the longer rates should go up, since they will be adding supply of bonds for sale. the last time the Fed started easing the balance sheet it really impacted the market to the point they had to pull back.

I feel like I’m in a group of circled wagons and about 10,000 Indians are gathering just over the hill and I can’t see them but I know they are coming.

 

[c_land]

Keep in mind when interest rates are due to go up in the near future investors tend to shy away from longer term bonds hence their yield will be lower. People will gravitate to lower duration bonds and those yields will move up.

Also the US government owns 25% of its own debt which are the longer term bonds. That purchasing demand by the fed helped to keep those longer duration yields low too. I’m not sure the the inversion has as much meaning right now as it would normally.

Once the Government starts selling its holdings of US bonds the longer rates should go up, since they will be adding supply of bonds for sale. the last time the Fed started easing the balance sheet it really impacted the market to the point they had to pull back.

I feel like I’m in a group of circled wagons and about 10,000 Indians are gathering just over the hill and I can’t see them but I know they are coming.

I thought their holdings were more front loaded? If that is correct, and the Fed moves forward with QT as a rolloff rather than outright sales, we may see further inversion than just that of the 2S10S.

I am VERY interested in learning how QT will go this time. it seems like there are three options from an uninformed outsider's opinion:

1. Rolloff: Letting holdings mature and avoid replacing with new purchases. This leads to roughly $1T in roll off in the next year, but mostly in the short end. Risk of inversion.
2. Sales of longer termed assets: This would steepen the curve on the long end, but requires a lot of selling as purchases to balance those maturing on the short end would also be required.
3. Sales of MBS: They have stated in FOMC minutes that they would like to be out of housing. Sales of MBS maintains a LITTLE bit of status quo for treasury purchases. If they sacrifice MBS in favor of maintaining some semblance of steepness in the yield curve, I think housing might get ugly. And with mortgage rates where they are now, this may not be a solution the fed will tolerate.
   
   
   https://twitter.com/i/web/status/1504914376322699267
   
   What do you think?

 

[Havasu blue label]

It’s coming some will take slow and dry others will be fine

 

[MSum661]

I thought their holdings were more front loaded? If that is correct, and the Fed moves forward with QT as a rolloff rather than outright sales, we may see further inversion than just that of the 2S10S.

I am VERY interested in learning how QT will go this time. it seems like there are three options from an uninformed outsider's opinion:

1. Rolloff: Letting holdings mature and avoid replacing with new purchases. This leads to roughly $1T in roll off in the next year, but mostly in the short end. Risk of inversion.
2. Sales of longer termed assets: This would steepen the curve on the long end, but requires a lot of selling as purchases to balance those maturing on the short end would also be required.
3. Sales of MBS: They have stated in FOMC minutes that they would like to be out of housing. Sales of MBS maintains a LITTLE bit of status quo for treasury purchases. If they sacrifice MBS in favor of maintaining some semblance of steepness in the yield curve, I think housing might get ugly. And with mortgage rates where they are now, this may not be a solution the fed will tolerate.
   
   
   https://twitter.com/i/web/status/1504914376322699267
   
   What do you think?

JMO, It could turn into mayhem thanks to the most reckless Fed ever in our lifetimes.
They say QE has ended but their QE balance sheet is left parked with $trillions that started repressing in 2008 and then again most radically starting in March of 2020, $5.76 trillion in Treasury securities and $2.73 trillion in MBS. Ouch.....think about that, and can they tighten fast enough with a spiking CPI and still unwind those kinds of QE numbers in a timely realistic manner? I seriously have my doubts.
At least Powell was somewhat honest when He commented yesterday sayin that QT won't start until May, but added that "no decision has been made"..... and then followed up with "no one expects that bringing about a soft landing will be straightforward in the current context - very little is straightforward in the current context."

I hate speculating, but I read all that as Code word's for they're deep in un-chartered waters and still have no idea how they'll manage getting through this gigantic "synthetic" mess they have created.

As you said..."I am VERY interested in learning how QT will go this time". Me too!

 

[BHC Vic]

CPI Inflation now at 7.9% and the FEDs first rate hike since 2018 of only 0.25%.
Technically speaking to combat the current 7.9% CPI the FED should have its benchmark rate somewhere in the ball park of 4-5%, not 0.25%.
Really puts it in perspective how badly far behind the curve the FED is right now.
Like you said....buckle up

There’s a lot of good videos on this subject. I’m not a doom and gloomer but I’m ready for sure.

 

[2Driver]

Pretty good article from Schwab's 2 analysts.

Charles Schwab

 

[RiverDave]

Can someone put this english please?

Right? Lol.

 

[2Driver]

Right? Lol.

Buy more MREs

 

[DrunkenSailor]

JMO, It could turn into mayhem thanks to the most reckless Fed ever in our lifetimes.
They say QE has ended but their QE balance sheet is left parked with $trillions that started repressing in 2008 and then again most radically starting in March of 2020, $5.76 trillion in Treasury securities and $2.73 trillion in MBS. Ouch.....think about that, and can they tighten fast enough with a spiking CPI and still unwind those kinds of QE numbers in a timely realistic manner? I seriously have my doubts.
At least Powell was somewhat honest when He commented yesterday sayin that QT won't start until May, but added that "no decision has been made"..... and then followed up with "no one expects that bringing about a soft landing will be straightforward in the current context - very little is straightforward in the current context."

I hate speculating, but I read all that as Code word's for they're deep in un-chartered waters and still have no idea how they'll manage getting through this gigantic "synthetic" mess they have created.

As you said..."I am VERY interested in learning how QT will go this time". Me too!

The one thing I can say is that the market on the mbs side is pretty heavily saturated. The mbs that has been securitized since 08 that the fed owns is not of a coupon yield that is going to excite bond buyers. Especially when current deals being booked carry a 4 handle on the non qm deals that are being printed right now.

 

[havasujeeper]

Since this thread is chalk full of brainiacs, I have a question regarding the pending recession. The majority of my saving is with Ally, since they usually pay a higher yield than brick and mortar banks. Does the brain trust think this is safe, of should I transfer to a Chase, B of A, or similar type bank?

 

[DrunkenSailor]

Can someone put this english please?

Right? Lol.

When a loan is originated the originator puts it on a warehouse line with a regional or street bank. Then the loan is sold to either an aggregator or placed on an aggregation line and bundled with other loans to be securitized.

Bonds classes are created and sold to investors at an interest rate return in accordance with risk level. AAA bonds are the largest tranche and are paid first in a sequential waterfall structure. As they hold the least amount of risk for default they also carry the lowest rate.

A non qm transaction will typically have 7 traunches where as a qm deal will have as many as 30 or more depending on the structure.

In a falling rate environment Refinance rates are high causing the CPR (prepay rate) to rise. As more people refi and payoff their loans the speed at which the bonds pay off accelerates. Most deals being printed right now have a 2-4 year weighted average life for the AAA debt.

When pricing the bonds they need to have a benchmark that is traded daily. Enter treasuries. The 2, 3, 5, 7 and 10 year treasuries all have a correlation to the weighted average life of the bonds being used in a security called spread. As spreads widen the yield difference between the two bonds is increasing.

Right now treasuries are on an all out tear to a level we haven't seen since 94. At the same time spreads are widening out on securitization because the bond market isn't buying as they believe rates are still not where they need to be and the Wal of these deals are no longer the 2-4 years on AAA. They are pricing them closer to 5-7. A longer commitment equals less return.

So spreads widen but mortgage pipelines can't keep up. A mortgage on average takes 45 days to fund. I raise rates today in 45 days I can sell that loan. The problem is in 45 days rates have risen another point and I am behind the curve. The mortgage company can hedge their position by buying treasuries and covering the loss but the bigger problem is on the securitization side.

There is a time lag with securitization. A securitization typically contains loans that were originated on average 3 months prior. 3 months ago interest rates were 3+ pointa lower. As bond investors continue to demand more yield due to longer durations they can only go so far before the coupon on the pool isn't high enough to cover the coupon on the bonds. I would argue we are there the past two weeks. The most recent printed deals will default in my mind. There just isn't enough meat on the bone. If spreads get any wider there will not be enough originated coupon to support the bond interest rate and there will be a major liquidity issue on the secondary market. When the secondary mortgage markets have liquidity issues the entire country feels it.

I think that's the 101 version in a nutshell. Anyone feel free to add anything I missed.

 

[DrunkenSailor]

I will add that with the fed promise to reduce their balance sheet of held bonds that the supply increase is not what the secondary market needs right now. This will most certainly make things worse

 

[DILLIGAF]

I get totally lost on the bond stuff. I have some in my portfolio and so forth but have never been able to figure them out for some reason. It gives me a fucking headache.

 

[2Driver]

I get totally lost on the bond stuff. I have some in my portfolio and so forth but have never been able to figure them out for some reason. It gives me a fucking headache.

Id look at it, if your bonds are paying sub 5% interest then you are about to lose some money.

 

[pronstar]

The repo market is also not looking good…it’s a good indicator of investor confidence.

 

[DILLIGAF]

Id look at it, if your bonds are paying sub 5% interest then you are about to lose some money.

Ya…my guy is working on it. I trust him after 30 years to do the proper thing. Seriously…Its like I have dyslexia when trying to understand bonds and so forth.

 

[2Driver]

Ya…my guy is working on it. I trust him after 30 years to do the proper thing. Seriously…Its like I have dyslexia when trying to understand bonds and so forth.

Try getting help at Dyslexia.moc.

 

[c_land]

I will add that with the fed promise to reduce their balance sheet of held bonds that the supply increase is not what the secondary market needs right now. This will most certainly make things worse

Yes... they made a massive policy mistake by not cutting QE when inflation first appeared. Now we all get to take their medicine.

 

[2Driver]

The problem this time is that raising interest rates wont solve supply chain inflation.

10 people show up to buy a Honda Accord and there are 2 available. How high would interest rates have to be to make 9 people walk from buying it when they need a car

 

[MSum661]

Yes... they made a massive policy mistake by not cutting QE when inflation first appeared. Now we all get to take their medicine.

The next CPI release comes out on April 12th. If the March number continues to climb and goes over the current 7.9% then they should consider an emergency rate hike of 50 bps right away and not wait it out until the next meeting in May.
Everything is moving rapidly. Brent Crude is back over $121.00, WTI is over $114.00, etc.

On a side note, I was just taking a peek at the average mortgage size today, all-time highs, and at the same time consumer savings is back down to around 6%.

 

[Ragged Edge]

Can someone put this english please?

I had the same thought.

 

[c_land]

The next CPI release comes out on April 12th. If the March number continues to climb and goes over the current 7.9% then they should consider an emergency rate hike of 50 bps right away and not wait it out until the next meeting in May.
Everything is moving rapidly. Brent Crude is back over $121.00, WTI is over $114.00, etc.

On a side note, I was just taking a peek at the average mortgage size today, all-time highs, and at the same time consumer savings is back down to around 6%.


View attachment 1099074

Agree with that. The oil price spike (energy) alone would probably be enough to push an 8 handle on CPI... then add the march increases to food, and owners' equivalent rent (shelter) YOY. March has been brutal for the big components of the CPI.

When the January CPI numbers were released at beginning of Feb, the market was betting big on a .50 BPS FFR hike. Ukraine/Russia stopped that, but the market is betting on it again after Powell's speech to NABE on monday. Things happen fast now, 45 days is a lot of time for another event to bring those chance back down.

Looping back to the topic of this thread.... yields probably go higher if all that's predicted comes to pass.

 

[2Driver]

Back in the 80’s I had 10k in a 3 year CD paying about 14%

 

[c_land]

20-year Auction today:

 

[lbhsbz]

When a loan is originated the originator puts it on a warehouse line with a regional or street bank. Then the loan is sold to either an aggregator or placed on an aggregation line and bundled with other loans to be securitized.

Bonds classes are created and sold to investors at an interest rate return in accordance with risk level. AAA bonds are the largest tranche and are paid first in a sequential waterfall structure. As they hold the least amount of risk for default they also carry the lowest rate.

A non qm transaction will typically have 7 traunches where as a qm deal will have as many as 30 or more depending on the structure.

In a falling rate environment Refinance rates are high causing the CPR (prepay rate) to rise. As more people refi and payoff their loans the speed at which the bonds pay off accelerates. Most deals being printed right now have a 2-4 year weighted average life for the AAA debt.

When pricing the bonds they need to have a benchmark that is traded daily. Enter treasuries. The 2, 3, 5, 7 and 10 year treasuries all have a correlation to the weighted average life of the bonds being used in a security called spread. As spreads widen the yield difference between the two bonds is increasing.

Right now treasuries are on an all out tear to a level we haven't seen since 94. At the same time spreads are widening out on securitization because the bond market isn't buying as they believe rates are still not where they need to be and the Wal of these deals are no longer the 2-4 years on AAA. They are pricing them closer to 5-7. A longer commitment equals less return.

So spreads widen but mortgage pipelines can't keep up. A mortgage on average takes 45 days to fund. I raise rates today in 45 days I can sell that loan. The problem is in 45 days rates have risen another point and I am behind the curve. The mortgage company can hedge their position by buying treasuries and covering the loss but the bigger problem is on the securitization side.

There is a time lag with securitization. A securitization typically contains loans that were originated on average 3 months prior. 3 months ago interest rates were 3+ pointa lower. As bond investors continue to demand more yield due to longer durations they can only go so far before the coupon on the pool isn't high enough to cover the coupon on the bonds. I would argue we are there the past two weeks. The most recent printed deals will default in my mind. There just isn't enough meat on the bone. If spreads get any wider there will not be enough originated coupon to support the bond interest rate and there will be a major liquidity issue on the secondary market. When the secondary mortgage markets have liquidity issues the entire country feels it.

I think that's the 101 version in a nutshell. Anyone feel free to add anything I missed.

That cleared everything right up. Thanks.

 

[OldSchoolBoats]

20-year Auction today:

Solid auction. Seems to have stopped some of the bleeding for now. 2.40 10 yr ceiling in tact. Don't know if there are any other headlines out there that are fueling the current move??

 

[HTMike]

I really wish I could understand the depth of this better. I'd need more of a white board visual.

 

[c_land]

Solid auction. Seems to have stopped some of the bleeding for now. 2.40 10 yr ceiling in tact. Don't know if there are any other headlines out there that are fueling the current move??

If the Fed governors could shut their mouths for a whole day things may balance out on their own lol. We should make the blackout period permanent.

I did just see this:

Japan's fiscal year end (next week) is restraining foreign bond purchases, and that restraint could ease at the beginning of April.

Also read something yesterday about quarterly pension fund rebalancing at the end of the month may give some additional relief into april.

 

[c_land]

Wow. big moves today.

https://www.cnbc.com/2022/03/25/us-bonds-treasury-yields-flat-friday.html

 

[OldSchoolBoats]

Wow. big moves today.

https://www.cnbc.com/2022/03/25/us-bonds-treasury-yields-flat-friday.html

Total blood bath right now for sure

 

[DrunkenSailor]

It just keeps getting worse... Inflation is obviously out of control and the fed waited too long to start making moves. Any talk of more stimulus needs to stop right now. We are paying the price for free money and supply chain issues.

 

[rivermobster]

I really wish I could understand the depth of this better. I'd need more of a white board visual.

I find it's much easier to pay someone that does this every day for a living.

 

[DrunkenSailor]

Since this thread is chalk full of brainiacs, I have a question regarding the pending recession. The majority of my saving is with Ally, since they usually pay a higher yield than brick and mortar banks. Does the brain trust think this is safe, of should I transfer to a Chase, B of A, or similar type bank?

As long as it's FDIC insured it's protected. If your over the FDIC limit of 250k open another account. Ally is massive so I doubt you will have a run on the bank situation where you will lose your savings if the bank folds but if you are under the 250k limit your insured.

 

[DrunkenSailor]

Big hit again today. 3yr is up .30 for the week and is 15bps above the 10 year. Reason for the move was citi bank released their outlook that the fed is going to issue 4 50bps rate hikes this year and the target is moving from a target of 2% to 2.5% by year end for the federal funds rate.

 

[2Driver]

As long as it's FDIC insured it's protected. If your over the FDIC limit of 250k open another account. Ally is massive so I doubt you will have a run on the bank situation where you will lose your savings if the bank folds but if you are under the 250k limit your insured.

And remember if shit really hits the fan there isn’t enough money in the FDIC to insure everyone.

 

[Orange Juice]

And remember if shit really hits the fan there isn’t enough money in the FDIC to insure everyone.

When ”shit hits the fan”, it’s all about where you’re standing. Location, location, location.

 

[Gonefishin5555]

And remember if shit really hits the fan there isn’t enough money in the FDIC to insure everyone.

They will just print it. My interpretation of this thing is that it is a classic short squeeze and the people holding the bag(Cash and bonds) are gonna get fucked. Spend all your cash and buy shit now asap buy buy buy