Winter is Coming! The Fed And Volatility Suppression (Stocks And Bonds)

Volatility for the 10 year Treasury note (TYVIX) has been suppressed since The Fed hammered down on vol starting in late 2008.

The same holds true for equities and the VIX. Suppressed since 2008.

But what happens IF The Fed (and other central banks) begin their great unwinds?

Winter is coming!


Wind Catastrophe Bond Price Sinks To 70 On Hurricane Irma (Frozen OJ Price Rises)

The Swiss Re US Wind Cat Bond Performance Index Price Return Index has sunk to 70 on Hurricane Irma’s projected path through Florida.


The Swiss Re Global Cat Bond Performance Index Price Return is at 80.

(Bloomberg) — Hurricane Irma probably will ravage Florida’s orange groves and sugar-cane crops once the powerful storm strikes the state this weekend. But the damage may not end there for the agriculture industry in the Southeast. Heavy rain and wind is projected to keep moving north into Georgia and reach parts of Tennessee, Alabama and the Carolinas, putting some of the top U.S. producers of chicken, cotton and hogs at risk.

“You’ve got your citrus and vegetable issue in Florida right away, and then as it moves on up into north Florida and Georgia, that’s right in the heart of peanut and cotton country, and soybean and corn country in southwest Georgia, primarily,” Agriculture Secretary Sonny Perdue, a Georgia native and former state governor, told reporters in Washington Friday.

Frozen orange juice concentrate rose on Irma news of a Florida strike.

Here is the volatility surface for FOJC futures.


The Hysteria Curve: US Treasury 10Y-2Y Curve Slope Declines To 78.6 BPs As 10 Year Soveriegn Yields Decline In Americas and Europe

Choose your hysteria to explain the Treasury market: 1) debt ceiling crisis, 2) hurricane (Global Warming) crisis, 3) North Korean nuclear attack crisis, 4) Trump’s Russian collusion investigation crisis, 5) the DACA (“Dreamer”) crisis, 6) Brexit crisis, 7) NAFTA crisis or 8) fill-in-the-blank crisis dejure. Please tune to CNN or MSNBC (and even Bloomberg) for the latest in hysteria.

Which ever portfolio of crises you select, we watching the US Treasury 10Y-2Y curve slope fall below 80 to the lowest slope since September 2016.


10 year sovereign yields in the Americas and Europe can down with the US falling around 10.1 BPS and Argentina down almost 40 BPS.1010

Gold prices are up since the 2016 election while the US dollar basket is down.


We are seeing a jump in equity and Treasury volatility, but not much.


Tune into MSNBC’s Rachel Maddow and Lawrence O’Donnel for particularly entertaining hysterical rants (like about Trump’s 2005 tax return).


Oct. 5 Maturity T-Bill Rate Surges as Debt-Limit Drives Out Investors

(Bloomberg) — Rate on Treasury bills maturing Oct. 5 rose by roughly 5bp to 1.1375% as investors continue shunning short-term securities vulnerable to a debt-ceiling deadline. 

  • “If you’re invested in a money fund because you wanted to be safe, the story of, ‘Oh, we’re being so safe. We’re avoiding bills that might not pay,’ tends to be better for them than, ‘I got you an extra three basis points,”’ said RBC strategist Michael Cloherty. “The yield impact is significantly in excess of the risk,” Cloherty said. “The risk is you’ll get paid a couple of days later. It’s not a massive price effect, even in the disaster scenario, and let’s pray it doesn’t get to that”
  • Money market funds such as Federated Investors and Invesco have said they are not holding October Treasury bills 
  • Oct. 5 maturities underperform later-dated Treasury bills; Oct. 12 rate 1.1213%, Oct. 19 1.085%, Oct. 26 0.9937%
  • Treasury Secretary Steven Mnuchin’s “critical” debt-ceiling deadline is Sept. 29, while CBO and Wall Street analysts see x-date in early- to mid-October

What is shunning? Dwight Shrute has the answer.

Actually, T-bills maturing on October 5th are now 1.1838%.


Here are Republicans, Democrats and President Trump in a standoff over the debt ceiling.


US Debt Ceiling, The Wall, Runaway Spending And The Lack Of Evidence Of Concern … So Far (Low US CDS)

The US Statutory Debt Limit, a failed tool to halt the endless growth of Federal debt issuance, is once again in play at nearly $20 trillion. It was only at $6 trillion in 2002.


The problem, of course, is runaway Fed spending which is currently at around twice that of Federal current tax receipts, requiring that the deficit be funded by issuing Federal debt (or raising taxes and/or cutting Federal spending).


The staggering increase in Federal debt starting in 2007 also resulted in a large spike in public debt to GDP.


The US has joined the European PIGs (Portugal, Italy, Greece, as well as Cyprus and Belgium) in having debt as a percentage of GDP being over 100%. The fourth debt piggie is Spain at 99.40% debt to GDP.


The core problem with Federal spending, now and in the future, is mandatory (entitlement) spending.


Of the entitlement spending, Medicare is growing at an unsustainable rate (although Medicaid growth is no slouch either).


So we are on an ussustainable track in terms of spending. How does “the wall” with Mexico fit it? It could be funded with more taxation, or spending cuts on other programs. Democrats LOVE raising taxes, but not to build a wall. Republicans are split on building a wall (open border freemarketeers versus those with national security concerns).

My colleagues at my former employer Deutsche Bank have attempted to lay out possible funding scenarios. Although I think the odds of deep spending cuts is about as likely as North Korea embracing personal freedom and capitalism.

debt ceiling tree

With explosive Federal spending and projections of public debt exceeding first $20 and then $30 trillion, I have little doubt that Congress and President Trump will agree on a debt limit increase even if there is a momentary government shutdown.

But right now, credit default swaps are signaling no shutdown, particularly in comparison to previous shutdown fears surrounding debt ceiling increases (orange boxes).


So, there is nothing YET showing up in the CDS data. We are seeing an increase in Treasury bills rates even when the probability of a Fed increase in their rates is very low for the next year.


The probability of a US default is around 0.04%.


But there is also a realization that while there was intial enthusiam that Trump would lower taxes and deregulate the economy,  there is has a steady decline in enthusiasm over his promises since Congress is obstructing most of Trump’s economic agenda.


We can hope that Congress and President Trump follow the advice of the band Canned Heat and work together. 

But we do know that Congress loves to spend money, so they have a natural mutual allegiance to raising the debt ceiling.

Perhaps Andy Dwyer and Mouserat from Parks and Recreation can rewrite their song “The Pit” as “The Wall.”




US Dollar Falls To Lowest Level Since January 2015 On Depressing Jackson Hole Speakers (10Y-2Y Slope Declines To 82.82 BPS)

The monetary retreat at Jackson Hole, Wyoming today was a dovefest. ECB’s Draghi and Bank of Japan’s Kuroda both said that accomodative monetary policy will continue.

And Yellen said very little of substance with no hint of tightening.

The reaction? The US Dollar fell to its lowest level since January 2015.


And the US Treasury 10 year – 2 year curve slope fell to 82.82 basis points.


Yes, optimism at Jackson Hole was in short supply, but hot air was everywhere.

Here are Janet Yellen and Mario Draghi singing “My Kuroda” with the Bank of Japan President. 


US 10Y-2Y Yield Curve Declines On Yellen’s Uninteresting J-Hole Speech (VIX Declines As Well)

I read Janet Yellen’s speech at Jackson Hole. And it was so uninteresting that I decided to read the NY Times article entitled “Why Women Had Better Sex Under Socialism.” Far more interesting.

Yellen largely defended post-crisis financial regulation and suggested to be careful with deregulation. She also expressed concern over Algo trading growth and a concern over a return of overoptimism.


After the hype about discussing something interesting faded away, the 10 year – 2 year yield curve slope fell to 83.689 basis points.


And the VIX remained muted.


True, the stock market rose today about 100 points then backed off a bit.


No mention, of course, of the out-of-control Federal spending (2x current tax receipts) that is contributing to staggering Federal debt increases.


Or the explosive growth in mandatory (aka, entitlement) spending since 2009.


She also didn’t mention the enormous wage growth gap in the US.


Or the lack of productivity since the financial crisis.


So in the words of Frank Drebin, “Nothing to see here. Please disperse.”