Asset Managers Flip To Net Short on Treasuries As UST 10Y-2Y Curve Slope Falls Below 80 BPS

Asset managers have flipped to net short on 10-year Treasury futures for the first time since November, according to CFTC data. The group reduced long positions the past three weeks after 10-year yields approached the 2 percent level in the lead-up to the September FOMC meeting. Even with the liquidation, yields have risen less than a quarter-point from year-to-date lows reached Sept. 8, suggesting the bull-market trend may still be intact.

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The US Treasury 10Y-2Y curve slope has just fallen below 80 basis points.

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Undun: US Treasury 30Y-5Y Curve Slope Falls To Lowest Level Since November 2007

The US Treasury yield curve slope for the 5Y-30Y segment is now at the lowest level since mid-November 2007.

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The 10 year Treasury note volatility index (TYVIX) is largely unchanged from The Fed’s unwind announcement on Wednesday at 2pm EST.

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The US Treasury curve is coming undun.

And that is pronouced UN-dun, not as is Kim Jong Un-dun (OON-dun).

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Fed Keeps Target Rate Unchanged, Yellen Sings “Tomorrow” For Balance Sheet Unwind

As expected, The Federal Reserve Open Market Committee (FOMC) kept their target rate unchanged at 1.25%.

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But The Fed announced that asset-shrinking (unwinding their $4.4 trillion balance sheet) would begin in October. Janet Yellen announced the balance sheet will be allowed to normalize, with reinvestments slowed/stopped starting in October. In fact, here is Federal Reserve Chair Janet Yellen announcing the date of the asset-shrinking.

The Fed’s DOT plot (green) is lower today than it was previously marked in gray) reflecting dimming prospects for rate increases in the future.

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BUT they are expecting a rate increase at the December FOMC meeting.

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On the news, the US Dollar smoked!

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Janet Yellen announcing the balance sheet unwinding accompanied by Goldman Sach’s Lloyd Blankfein.

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BIS Hunts for ‘Missing’ Global Debt, Inflation (Try Including Housing!)

Just like global central banks, the Bank for International Settlements can’t seem to find inflation and $114 trillion in off-balance sheet FX derivatives.

ZURICH – Nonfinancial companies and other institutions outside of the U.S., excluding banks, may be sitting on as much as $14 trillion in “missing debt” held off their balance sheets through foreign-exchange derivatives, according to research published Sunday by the Bank for International Settlements.

These transactions, which resemble debt but for accounting purposes aren’t classified that way, aren’t new. Rather, researchers from the BIS — a consortium of central banks based in Basel, Switzerland — used global banking data and surveys to estimate the size of this debt for the first time.

The implications for financial stability are unclear because FX swaps are backed by cash collateral and can be used to hedge exposure to currency swings, thus promoting stability. Still, the debt “has to be repaid when due and this can raise risk,” the authors wrote.

According to the paper, published with the BIS’s quarterly update on global financial conditions, non-banks outside the U.S. owed roughly $13 trillion to 14 trillion through foreign-exchange swaps and forwards. That exceeds the nearly $10.7 trillion in dollar debt held on their balance sheets at the end of the first quarter

“Non-banks” include nonfinancial companies, households, governments, and certain financial institutions that aren’t classified as banks and international organizations.

Globally, there are $58 trillion in FX swaps and related exposures, BIS said, which equals about three-quarters of global gross domestic product.

The authors explained that “in an FX swap, two parties exchange two currencies spot and commit to reverse the exchange at some pre-agreed future date and price.” In a forward contract, parties agree to swap currencies at a future date and price. “Accounting conventions leave it mostly off-balance sheet, as a derivative, even though it is in effect a secured loan with principal to be repaid in full at maturity,” the paper noted.

This short-term funding is backed by cash and it carries little credit risk. “Even so, strains can arise,” the authors wrote, citing the funding squeeze experienced by European banks during the global financial crisis.

The BIS’s quarterly review didn’t just examine missing debt, it also examined what it called “missing inflation” in the global economy, which has helped spur risk taking and drove up financial asset values in recent months.

The implications are big for stock and bond markets that have moved largely in tandem, with bond yields staying super low while equity markets reached record highs. Whereas faster growth typically implies higher inflation and central bank rate increases, the prospect of significantly tighter monetary policy in the U.S. and other big economies has receded.

“This puts a premium on understanding the ‘missing inflation’, because inflation is the lodestar for central banks,” said BIS chief economist Claudio Borio.

Annual inflation in the U.S., measured by the price index for personal-consumption expenditures, was 1.4% in July. Annual eurozone inflation was 1.5% in August. Both are well below the 2% rate that most big central banks consider optimal. Economists typically cite sluggish wage growth, heightened global competition, low oil prices and the effects of technological changes as explanations for subdued price pressures.

“Despite subdued inflation in advanced economies, the global macro outlook was upbeat. Market commentators label such an environment the Goldilocks scenario — where the economy is ‘not too hot, not too cold, but just right,'” BIS said.

Still, there are risks if bond yields eventually start to rise on the back of firmer global growth, given the sensitivity of the private and public sectors to debt.

Thus, the absence of inflation “is the trillion dollar question that will define the global economy’s path in the years ahead and determine, in all probability, the future of current policy frameworks,” said Mr. Borio.

Dear Federal Reserve and BIS. Try including house prices which are growing at fantastic rates of growth.

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Tell folks in New Zealand and Australia that there is “no inflation.”

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The US almost looks tame in terms of housing pirces compared to Britain and its former colonies where housing prices are growing over twice as fast as wage growth for the majority of the population.

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New Zealand takes the cake for crazy housing prices, particularly in Auckland, their largest city.

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There BIS. We found your missing inflation. 

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Debt Limit Gums Up Treasury’s Plan for Supply Bump as Fed Tapers

(Bloomberg) — The U.S. Treasury has been planning for years how to deal with the funding gap set to open up when the Federal Reserve begins unwinding its $2.5 trillion hoard of the government’s debt.

Now there’s a new wrinkle to prepare for, as the latest deal to extend the nation’s debt limit complicates matters for Treasury Secretary Steven Mnuchin just as the Fed is expected to unveil the start of its balance-sheet reduction.

With the debt-cap suspension expiring Dec. 8, there’s a growing sense among investors and analysts that Treasury will have to slow or hold off on the inevitable — increasing note and bond sales to deal with the shift in Fed policy and rising federal deficits. Most strategists had predicted that long-term tilt toward more coupon issuance would start in November, so a delay may provide a boost for bond bulls betting yields can stay near historic lows.

“The debt-limit issue will in the near-term affect what Treasury does with coupon issuance,” said Gene Tannuzzo, a money manager at Columbia Threadneedle, which oversees $473 billion. “At the end of the day, Treasury will have to do a lot more coupon sales. On the margin, for now, if there is less coupon issuance it is a modestly positive technical” for Treasuries.

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Just how exactly Treasury will respond to the Fed’s tapering is one of the great unknowns facing investors. The mix of maturities it decides on has far-reaching implications for the world’s biggest bond market, with the potential to alter the shape of the yield curve for years to come.

A Treasury spokeswomen, Marisol Garibay, declined to comment.

That is, IF the Fed tapers their balance sheet.

The Fed is likely to cap reinvestments of Treasuries and Agency MBS rather than outright sell them out of their portfolio. Agency MBS gradually bleed off due to mortgage refinancings and Treasuries eventually mature.

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If anyone is worried about the budget gap, imagine what it will look like with Bernie Care (Medicare for all)!

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Since Medicare is already growing at an explosive rate.

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Hurricane Equifax II: Even Wells Fargo Says To Consider A Credit Freeze

How bad is the Equifax data breach? Where 143 MILLION consumers potentially had their Social Security numbers, credit card numbers and birthdates revealed? It is so bad that a major US bank, Wells Fargo, suggested that customers consider placing a freeze on their credit.

That is fine for those who don’t use credit on a regular basis, but what about those people who still wish to borrow funds to purchase a home or automobile? By NOT freezing your credit, you are at risk of loans being (fraudulently) taken out in your name.

Although Equifax was the primary recipient of market wrath, the other major credit monitoring companies Transunion and the UK’s Experian have experienced declined in their equity values as well.

And with real estate, automobile and credit card lending already in a decline YoY, imagine what a credit freeze will do?

Here is the Federal Trade Commission’s FAQ on freezing your credit.

Now the Wells Fargo wagon is suggesting freezing your credit which means no more loans.

Where’s The Unwind? Fed Actually Adds $15 Billion To Balance Sheet (As “Inflation” Remains Low And Home Prices Soar)

The Federal Reserve has been jawboning their intent to unwind their almost $4.5 trillion balance sheet, nearly all of which is either Treasurys or mortgage-backed securities.

The Fed’s Balance Sheet has pretty much been on hold (treading water) since 2014 and the end of QE3, their third round of asset purchases.

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But the System Open Market Account (SOMA) report from 9/13/2017 shows that The Fed actually added around $15 billion to its balance sheet.

soma091317So, no balance sheet unwind yet.

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Remember, The Fed’s notion of inflation (US Personal Consumption Expenditure Core Price Index YoY) remains under their target rate of 2% at 1.40% YoY.

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And core CPI growth YoY is at 1.7%, also under the 2% target.

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And with asset prices such as for housing exceeding wage growth by over 2x, The Fed has quite a bit to consider before pulling the handle on the balance sheet unwind.

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The US Treasury 10Y-2Y curve slope has declined from around 280 basis points in 2010-2011 to under 82 basis points today.

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Here is inflation that is hiding that The Fed doesn’t want to consider.

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