Is This The Most Important Chart In The World?

"This is possibly the most important chart in the world..." As 13D Global Strategy and Research noted:

A breach of the top-line of the channel could signal a major reversal in the multi-decade downtrend in UST bond yields."

So the question is - is an event engineered to slam rates lower, in order to avoid interest expense soaring beyond US government capabilities; or is the event a reaction to over-exuberant bubble-fueled positioning in risk assets?

What is perhaps most worrisome for that channel breakout is that speculative traders have almost never been more net long the long-bond...

In 1998, 30Y yields jumped from under 5% to almost 7% in the next year.

In 2004, 30Y yields extended their drop after peak positioning (from 5% yield to 4%) in the next 3 months.

In July 2016, 30Y yields spiked from 2% to well over 3% in the next 4 months.

So what will happen this time?

Even after one of the worst 3-day steepenings of the yield curve last week, specs failed to cover...

And today bonds are bid further.

Bond Bears Beware As Ag Prices Hit Record Low

Long-end bond yields are lower and the front-end higher once again this morning as the US Treasury yield curve continues to confound by flattening. Bloomberg macro strategist Mark Cudmore suspects there is more to come... for one simple reason, so often overlooked...

Via Bloomberg,

Cheaper eats are great, but maybe not if you’re one of the many expecting a sustainable bump in bond yields next year.

Falling food prices risk wrecking the forecasts -- seen pretty much every December for years now -- for yields to climb in the new year. Ten-year Treasury rates haven’t closed a year above 2.45 percent since 2013.

 

Bond bears seem to struggle to incorporate structural disinflationary pressures that have come from technology and globalization.

 

The Bloomberg Agriculture Subindex on Monday hit its lowest level since the series began in 1991. Technology and science are making the agriculture industry increasingly efficient, and there are still plenty of production gains to be made globally.

 

 

Combined with the overhang of energy supply that’s capping oil prices -- and therefore processing, transport and distribution costs -- that means the long-term trend remains one of cheaper food prices.

 

And food prices are a key component of consumer price index baskets around the world.

 

The impact is global, real and seems to be constantly underestimated.

 

Since Saturday, China, Denmark, Norway and the Czech Republic have all released CPI prints where the annual rate was both decelerating and below expectations. Food prices were specifically cited in China’s case.

None of this is to argue that bond yields can’t spike higher for short periods, notes Cudmore, but it’s just an argument to highlight that structural disinflationary pressures from technology remain strong and shouldn’t be dismissed.

With several major central banks indicating that the marginal bias is to tighten policy, that will further crimp price rises. And that doesn’t bode well for a sustainable broad rise in developed-market yields.

Bank of America: "We"ve Seen This Movie Before: It Ends With A Recession"

In a merciful transition from Wall Street"s endless daily discussions and more often than not- monologues - of why vol is record low, and why a financial cataclysm will ensue once vol finally surges, lately the main topic preoccupying financial strategists has been the yield curve"s ongoing collapse - with the 2s10s sliding and trading at levels last seen in April 2015, and with curve inversion predicted by BMO to take place as soon as March 2018. And, according to at least one other metric, the yield curve should already be some -25bps inverted. This is shown in the following chart from Bank of America which lays out the correlation between the US unemployment rate and the 2s10s curve, and which suggests that the latter should be 80 bps lower, or some 25 basis points in negative territory.

Here is some additional context from BofA"s head of securitization Chris Flanagan, who views "the recent sharp flattening of the yield curve, which has seen the 2y10y spread go from 80 bps to almost 50 bps since late October, as the natural course of events at this stage of the economic cycle. Unemployment is low, and probably headed lower, and the Fed is intent on raising rates to stave off future inflation; we"ve seen this movie before and it typically ends with a flat or inverted yield curve. Based on history (and gravity), we think the most likely path forward is that the 2y10y spread reaches zero or inverts sometime over the next year or so and that recession of some kind follows in 2020 or 2021. (Given that the curve has flattened 30 bps in just over a month, projecting an additional 50 bps flattening over the next year is not really too bold.) Of course, much can happen along the way to change that outcome, but for now that seems to us to be the most likely course of events to us."

Here Flanagan openly disagrees with the BofA"s "house call" of a steepening yield curve, and explains why:

We note that flattening is not the house call: BofAML rates strategists believe the curve will steepen due to easier fiscal policy, higher deficits, and a higher inflation expectation and the Fed will require higher 5y-10y yields as a precondition to flattening or inverting the curve. We recognize that the flattening process has already taken longer than we expected a few years back, due to multiple dovish Fed hikes, and we acknowledge the potential for what we think would be steepening detours along the way. In our Year Ahead Outlook, we tried to be especially mindful of the fact that a year is a long time and a lot can happen along the way. This would be a good example. Nonetheless, the Fed"s recent intentness on tightening in the face of low inflation readings makes us believe the last 50 bps of flattening likely will be achieved over the course of 2018.

Flanagan asks if a flattening curve is "a serious (grave) present day problem?" While it is true that a yield curve flattening and inversion always precedes a recession, the timing remains in flux. As a result, BofA notes that based on the history of the late 1990s and the 2005-2007 period, when the curve previously flattened into the 50 bps area, "we think it could be as long as 2+ years from now before spreads begin to meaningfully widen, which means 2020. In the meantime, again with history as a guide, we think securitized products spreads can continue to grind tighter. In other words, we are unlikely to see meaningful spread widening until recession actually arrives or is imminent. The recent sharp curve flattening is certainly noteworthy, but, in our view, it is way too early to start positioning for meaningful spread widening. The bull run in credit spreads has not yet ended and probably will last longer than many might expect."

Finally, for some timing context, BofA shows the following chart of GDP growth vs the yield curve: the curve hit zero by the end of 2005 and inverted in 2006; economic growth steadily slowed in 2006 and 2007 but it wasn"t until 2008 that the downturn accelerated. Credit spreads widened and began anticipating the downturn in mid-2007, after the curve had been flat for over a year.

Tailing 2Y Auction Prices At Highest Yield Since September 2008 As Foreign Buyers Stay Away

With 2Y yields having jumped sharply in recent week, it was not surprising that today"s auction of $26 billion in 2Y paper would have a high yield, and sure enough, printing at a high yield 1.765%, the highest since September 2007, tailing the When Issued 1.763% by 0.2bps, and well above the six previous auction average of 1.410%. This was the third consecutive tailing 2Y auction.

The internals were hardly impressive, with the bid-to- cover of 2.725, lower than both last month"s 2.74 and also below the six previous auction average 2.91.  In fact, it was the lowest since January"s 2.682%, with total bids of $72.3bn for $27.4bn in notes sold vs six previous auction average of $78.0b in bids for $28.3b in notes sold.

Also not surprising perhaps is that foreign buyers were less than enthusiastic, with Indirect bidders awarded only 41.9% of the auction, down sharply from last month"s 48.2%, and below the 6 month moving average of 51.7%. It was also the lowest since December 2016. Dealers were awarded almost the same, or 41.2%, far higher than the six previous auction average 32.7%. Finally, direct bidders received 17% of the auction, roughly in line with the 17% average of the prior 6 auctions.

Overall, the auction confirms that investor interest for the short-end of the curve is waning, and suggests that more rate hikes by the Fed are coming, which in turn will push the 2Y yield even higher, further steepening the yield curve in the coming days.

The Yield Curve Has Not Been This Flat In 10 Years, And Many Believe This Is A Sign That A Recession Is Imminent

This article was originally published by Michael Snyder at The Economic Collapse

Whenever we see an inverted yield curve, a recession almost always follows, and that is why many analysts are deeply concerned that the yield curve is currently the flattest that it has been in about a decade. In other words, according to one of the most reliable indicators that we have, we are closer to another recession than we have been at any point since the last financial crisis. And when you combine this with all of the other indicators that are screaming that a new crisis is on the horizon, a very troubling picture emerges. Hopefully this will turn out to be a false alarm, but it is looking more and more like big economic trouble is coming in 2018.

The professionals on Wall Street take the yield curve very, very seriously, and the fact that it has gotten so flat has many of them extremely concerned. The following comes from Business Insider…

In the past, including before the Great Recession of 2007-2009, an inverted yield curve, where long-term interest rates fall below their short-term counterparts, has been a reliable predictor of recessions. The bond market is not there yet, but a sharp recent flattening of the yield curve has many in the markets watchful and concerned.

The US yield curve is now at its flattest in about 10 years — in other words, since around the time a major credit crunch of was gaining steam. The gap between two-year note yields and their 10-year counterparts has shrunk to just 0.63 percentage point, the narrowest since November 2007.

If the yield curve continues to get even flatter, it will spark widespread selling on Wall Street, and if it actually inverts that will set off total panic.

And with each passing day, even more of the “experts” are warning of imminent market trouble. For example, just consider what Art Cashin told CNBC the other day…

Investors may want to take cover soon.

Art Cashin, UBS’ director of floor operations at the New York Stock Exchange, says a “split personality” is manifesting itself in the stock market, and it could hit Wall Street where it hurts at any moment.

“We’ve been setting record new highs, and often the breadth has been negative. We’ve had more declines than advances,” Cashin said Thursday on CNBC’s “Futures Now.”

When the financial markets finally do crash, it won’t exactly be a surprise.

In fact, we are way, way overdue for financial disaster.

Since the last financial crisis, we have been on the greatest debt binge in human history. U.S. government debt has gone from $10 trillion to $20 trillion, corporate debt has doubled, and U.S. consumer debt has now risen to nearly $13 trillion.

Debt brings consumption from the future into the present, and so it increases short-term economic activity at the expense of long-term financial health.

But we simply cannot continue to grow debt much, much faster than the overall economy is growing. I have never talked to anyone that believes that our debt binge is sustainable, and I doubt that I ever will.

The only reason why we have even gotten this far is because interest rates have been pushed to historically low levels. If the average rate of interest on U.S. government debt even returned to the long-term average, we would be paying more than a trillion dollars a year in interest on the national debt and the game would be over. Unprecedented intervention by the Federal Reserve and other global central banks has pushed interest rates way below the real rate of inflation, and that has bought us extra time.

But now the Federal Reserve and other global central banks are reversing course in unison, and global financial markets are already starting to decline.

The only way we can keep putting off the next financial crisis is if we continue our unprecedented debt binge and if global central banks continue to artificially prop up the financial markets.

Of course more debt and more central bank manipulation would just make the eventual financial disaster even worse, but that is what we are faced with at this point.

Most people simply don’t understand the gravity of the situation. Nothing was ever fixed after the last financial crisis. Instead, we went on the greatest debt binge that humanity has ever seen, and central banks started creating trillions of dollars out of thin air and recklessly injected that hot money into the financial system.

So now we are in the terminal phase of the largest financial bubble in human history, and there is no easy way out.

We basically have two choices. We can have a horrific financial crisis now, or we can have one a little bit later.

Usually the choice is “later”, and that is why our leaders have been piling on the debt and global central banks have been recklessly creating money.

But it is inevitable that our bad choices will catch up with us eventually, and when that happens the pain that we are going to experience is going to be absolutely off the charts.

Michael Snyder is a Republican candidate for Congress in Idaho’s First Congressional District, and you can learn how you can get involved in the campaign on his official website. His new book entitled “Living A Life That Really Matters” is available in paperback and for the Kindle on Amazon.com.

Michael T. Snyder is a graduate of the University of Florida law school and he worked as an attorney in the heart of Washington D.C. for a number of years.Today, Michael is best known for his work as the publisher of The Economic Collapse Blog and The American Dream. 

If you want to know what is coming and what you can do to prepare, read his latest book Get Prepared Now!: Why A Great Crisis Is Coming.

Just Two Charts

Before the cash equity market opens, we thought these two charts may help...

FX carry is not helping...

 

And bonds ain"t buying it...

 

Bonus Chart - the yield curve just hit a new cycle low...

"One Simple Reason The Yield Curve Is Collapsing"

The divergence between the "hope" melt-up in stock markets and the "nope" collapse of the US Treasury yield curve has never been so wide... and has never engendered so many excuses by commission-takers and asset-gatherers for why the latter is wrong and the former correct.

One thing is clear, as The Fed tightens rates, the market is increaingly insensitive to the next tightening as financial conditions have eased dramatically as the Fed tightens. Former fund manager Richard Breslow suspects "you ain"t seen nothing yet" as the linkage between FOMC raising rates and a flattening yield curve suggests this tradable trend is far from over.

Via Bloomberg,

The yield curve in the Treasury market has continued on its flattening way. Look at a one-year chart and it shows a relentless, if at times choppy, move from its widest at the beginning of the period to today’s new tight. Everyone seems to have their theories why and what it means, giving clear proof that great minds can differ. And even the bond market isn’t simply well-established science. One thing that they do agree upon is the obvious: it’s been a clear, tradable trend. But before we start waxing eloquent on the historic magnitude of the move, keep in mind, this tightening absolutely pales in comparison to several others of the last 25 years.

It’s perhaps been so confounding only because, for all the ink spent on it, it’s been relatively gentle and gradual compared to past episodes. And why should that be?  

 

Perhaps because the FOMC has been raising rates at such a slow, methodical pace. And even then, investors continue to doubt the dots, despite December being taken as a given.

 

[ZH: As we noted previously, financial conditions did not snap tighter until The Fed has tightened rates to 5.25% in 2007]

 

Yield-curve moves have been intimately linked to FOMC policy direction and the speed of change. So, consider what might happen should the market come around to the Fed’s forecasts. Or the other way around. But don’t think the spread is necessarily anywhere near some impregnable floor.

 

 

 

And, most certainly, avoid falling for the notion that all by itself it will tell you where the economy is headed. That’s only the case if you believe the Fed always ends up over-doing it. Which may indeed explain the Greenspan era and why bond traders loved him so much--once everyone was able to put the 1994 spat behind them and he worked so hard to make it up to them.

 

All of this raises another angle to ponder. The Fed continues to enjoy a tremendous free-ridership advantage of tightening while the ECB and BOJ keep pumping in liquidity. Investors are forced to keep buying Treasuries on any back-up, and if not gagging on the prices, certainly retching every time there’s a lecture about complacency. Governor Kuroda has been emphatic that Japan must motor on pumping in liquidity with inflation continuing so low. President Draghi was able to fend off those who wanted a “clear exit” from asset purchases.

 

Many doubt, however, this forward guidance will hold. It’s not as if QE is exactly popular any more. And if economic slack continues to disappear any hint of inflation will be met by two competing responses.

 

Calls to let prices overshoot and be patient. And markets rushing to price in policy shifts from these two banks. That’s when all the back-slapping about how well it’s all going gets tested. It’s unclear whether this “all clear” sign for the rest of the world will let the Fed loose or make them rein in their ambitions.

The only thing we can be reasonably sure of, Breslow concludes, is the Fed realizes that whatever happens they need to make hay while the sun shines and history argues that is a curve flattener.

It"s Time To Take Central Bankers" "Calm Assurances" With A Pinch Of Salt

"It could be time to fire up your engines," suggests former fund manager Richard Breslow, urging some life back into the seemingly oblivious markets...

Via Bloomberg,

There’s a lot of uncertainty out there and the response to it shouldn’t be an inability to trade. How about a little frenetic back and forth?

We could use some of the good kind of noise, as in, let’s show a little life. Markets are inching toward some really interesting levels and it’s time for them to show a little spirit and giddy up.

For once, try taking central bankers at their word that tapering and, eventually, rates, are on the move. And take all of these blithe assurances that everything during the process will be calm, cool and collected with a grain of salt. We need to stop saying global economic growth and trade are showing meaningful strength and then agree that everything is still horrible and we can’t afford to change.

 

 

Do you know why there’s no inflation? We measure it incorrectly. I can assure you it’s more expensive to live than it used to be. Which is the simplest and truest definition. Why isn’t wage growth higher? Because we’ve utterly skewed the relative bargaining power between capital and labor. Monetary policy will never be able to fix that. Nor the masses forever soothed by rolling out another reality show.

 

No matter who is selected as the next Fed Chair, rates are likely going up in December and will be in play for March. Tapering is beginning. The BOE is looking to pull back some stimulus and the ECB wants to as well. Even the BOJ has begun to include warnings about investor complacency in their comments. Yesterday’s Japanese election may seem like a strong endorsement of the status quo, but it has also changed the underlying discussion on a number of topics in a meaningful way. The Bank of Canada may be on pause, but they are among a number of banks waiting to pull the switch.

 

At whatever point along the Treasury yield curve you look, the charts suggest we have crept up to important pivot points. And it’s going to be even more apparent if the recent mini bounce in its steepness can generate some momentum. What a difference it will feel like if the 10-year can break above 2.40%. Not a big ask given we sit so close below. Yet, if it was so easy, we wouldn’t be having this discussion. Twos and fives are right where they will have to decide whether to fish or cut bait. Where they go from here matters. And if I wanted to be a starry-eyed optimist, I’d point out that while it remains low, option volatility has traced out a nice floor since July and has been trying to push higher in the last week.

 

 

The dollar, too, is showing some signs of life, even though the majors continue to see volatility selling. The dollar index traded at 94 this morning and if it can eke out another half-percent, there’s going to be a different narrative circulated.

 

 

Which countries’ set of woes will take center stage? Or to put it another way, how much of whose bad news is already priced into prevailing levels?

As Brewslow concludes, "I hope this all leads to something interesting... Because who wants to sit around watching the paint dry some more."

In any case, at these prices, you definitely have something well worth watching. Volatility pricing can be backward looking as well as prescriptive.

Curve Flattens After Blistering 30Y Auction Stops Through, Highest Bid To Cover In Two Years

After yesterday"s stellar 10Y auction, today at 1pm the Treasury sold the last of three weekly auctions, by offering $12 billion in 30Y paper to eager buyers. And eager they were, with the high yield of 2.870% stopping through the When Issued 2.874% by 0.4 bps. This was the biggest strop through on a 30Y auction going back to October 2016.

It wasn"t just the stop out that was strong, but the Bid to Cover as well, which at 2.530 was the highest going all the way back to September 2015. The internals were similary impressive, with Indirects taking down 62.8%, up from 58.8% in September, and on top of the 6 month average of 62.4%. Directs ended up with 10.6%, the highest award since March, higher than the 6.1% average, while Dealers were left holding 26.6% of the auction, the lowest dealer takedown since March, suggesting once again that even a modest increase in yields and foreign duration seekers crawl out of the woorwork and buy any US paper they can find.

Overall, while not a strong as yesterday"s 10Y auction, there were blistering demand for today"s last weekly auction, which was observed earlier courtesy of the 5s30s which has been flattening all day, sending the yield curve to the flattest in years.

And The Best-Performing Asset Since The Fed Started Hiking Rates Is...

...Gold!

After all the concerns about interest-rate hikes curbing gold’s appeal, the metal has managed to retain its luster.

Since Dec. 15, 2015, a day before the Federal Reserve began its current cycle of U.S. rate increases, bullion has climbed 18%. The barbarous relic has outperformed the broadest measure of US stocks (NYSE composite) as the long-bond is unchanged since Dec 2015 and commodities plunging back after inflation hope fades.

As Bloomberg notes, non-interest-bearing gold is getting an added boost from speculation that the Fed will be slow to raise rates further, with 10-year Treasury yields near the lowest since November (below where they were at the start of the rate-hike campaign in 2015) and the yield curve has collapsed each time The Fed hiked rates...

Perhaps the yield curve is reflecting the post-China-Credit-Impulse collapse in US macro data (no matter how hard and fast economists cut estimates, it"s still disappointing)...

But then again, there is a bigger divergence... between inflation and earnings expectations that could spell trouble for investors, according to a note by analysts at Strategas Research Partners.

As Bloomberg notes, while the U.S. Treasury curve has flattened, with 10-year yields falling, equity analysts are staying bullish on earnings growth.

“The factions are known to disagree from time to time, but are rarely both right supporting divergent views,” analysts led by Nicholas Bohnsack, wrote in a note to clients Thursday. “Stay tuned.”

In Warning To Wall Street, Jefferies Fixed Income Revenue Tumbles 33%

On one hand, the Q2 earnings reported by the last "pure play" investment bank - one with a 1 month leading quarter end as per the pre-new normal tradition and thus a key indicator of what is to come for the rest of Wall Street - were not bad: Jefferies reported a 29.4% increase in overall quarterly profit (even with a recent 6% increase in the company"s tax rate) thanks to a 39% bounce in investment banking revenue, i.e. M&A and underwriting fees, to $351.9 million in the quarter, primarily reflecting an "improved environment" for debt and equity new issuance according to CEO Dick Handler.

That was the good news.

The neutral news is that revenue from equities (when stripping away one-time benefits from the sale of KCG) was roughly flat, at $175.5MM in the quarter, up fractionally from $167.5MM one year ago. Total equity revenues were $271.5 million but including $96 million in mark-to-market gain on Jefferies" 24% equity ownership of KCG Holdings vs $223.5 million a year ago  (with $56m KCG markup). According to Handler, the core equity sales/trading business "enjoyed a solid quarter and, despite quiet market activity and low volatility, our global cash businesses continued to gain market share."

But the bad news, and a confirmation of recent warnings from JPM and BofA, was that the recent boost in fixed income revenue, Wall Street"s most profitable segment, tumbled by 33% in the second quarter, dropping from $238.5 million to $158.6 million Y/Y, and down from $221.9 million last quarter.

Discussing the sharp drop in fixed income revenue, the Leucadia subsidiary said that "Fixed Income revenues were $159 million for the quarter as lower volumes and lower volatility prevailed throughout much of the quarter."

The problem for the rest of Wall Street is that "lower volumes and lower volatility" were endemic for everyone, impacting the rest of the banks equally, which coupled with the ongoing flattening of the yield curve  - recall banks surged when the curve steepened, but then forgot to drop when it contracted...

... means that bank earnings reports next months will likely be even worse than what many analysts expect.

Finally, Jefferies had an interesting disclosure on why it ended up paying a far higher tax rate this quarter compared to others:

Our tax expense for the quarter was $46 million, or about 40% of pre-tax profits. Following recently enacted legislation from New York State and New York City, our tax expense includes a net charge of $7 million that reflects the revaluation of a portion of our net deferred tax asset, which was partially offset by current year reduced state and local tax rates. The impact of this legislation will reduce the income apportioned to these jurisdictions going forward and thereby reduce our effective tax rate.

While we are not sure precisely what legislation Jefferies refers to, one wonders how many other companies will follow in the bank"s footsteps and "apportion" far less jurisdiction to New York State and City going forward, potentially resulting in a fiscal crisis for the largest US fiscal economy.

10-Year Treasuries Break Key Trendline As Yield Curve Collapses

10-year US Treasury yields just broke to 2.10% for the first time since November 10th, and more importantly tumbling through a key trendline support from a year ago...

h/t @RaoulGMI

Sending the yield curve near cycle flats...

The entire post-Trump-Election reflation trade is collapsing...

This does not look like the plan Janet!!

Treasury Concludes Weekly Treasury Sales With Strong, Stopping-Through 30Y Auction

Following a spectacular 3Y auction, and a strongish sale of 10Y paper on Monday, today the Treasury promptly concluded its weekly sale of Treasurys today ahead of the Fed"s 2-day meeting tomorrow, when it sold $12 billion in 30Y paper in a solid auction, with a high yield of 2.87%, stopping through the When Issued of 2.873, by 0.3bps, the first non-tailing 30Y auction since February. The stop out on today"s auction was the lowest since October"s 2.47%, which is somewhat surprising coming ahead of tomorrow"s 25 bps rate hike, which traders seem to expect will push yields lower not higher in a further flattening of the yield curve.

The internals were solid, with the bid to cover rising from 2.191 in May to 2.32 in June. Total bids amounted to $27.8bn for $12.0bn in bonds sold vs $37.8b in bids for $20.0bn in bonds sold at the previous auction.

Indirect bidders were awarded 63.7% vs previous auction’s 59.1%, and just above the 6 month average of 63.6%. Direct ended up with with 6.7% of the allotment vs 5.3% in the previous auction, while Dealers were left holding 29.6% vs last auction’s 35.6%: numbers which largely were in line with recent expectations.

Following the week"s auctions, one can conclude that few buyers, among them primarily foreign central banks, are too worried about a sharp blow out in yields as a result of Yellen"s announcement tomorrow, suggesting that just like stocks, bonds also expect a "dovish hike."

Fink Fears Bond Curve Signals, Cooperman Warn Stocks Ahead Of Fundamentals

US equity markets pushed back into the green this morning just as two heavyweight investors suggested all is not well in the land of exuberance. Blackrocks" Larry Fink warned the equity market is not appreciating the message from the Treasury yield curve (and sees lower growth than Trump hopes for), while Omega"s Cooperman warned that markets are fully priced, and ahead of fundamentals.

Fink headlines from his comments at a Deutches Bank conference:

• *BLACKROCK"S FINK SAYS SEEN VERY LITTLE ON REFORM FROM TRUMP


• *FINK: EQUITY MARKETS REMAINER OF YR DEPENDS ON TRUMP


• *FINK: SAYS U.S. GROWTH IN MID-2S IS NOT HAPPENING


• *FINK: WE"RE STARTING TO SEE EXCESSES IN CREDIT MARKETS AGAIN


• *FINK: CREDIT MARKETS ARE RICH


• *FINK: MARKET ISN"T APPRECIATING THE YIELD CURVE

And Omega"s Cooperman was on CNBC:

• *COOPERMAN: MARKET IS FULLY PRICED, AHEAD OF FUNDAMENTALS


• *COOPERMAN: WOULDN"T OWN BONDS, VERY FULLY VALUED

But then added...

• *COOPERMAN: CONDITIONS THAT SPUR MARKET DECLINES NOT PRESENT

As BofA wrote just this morning, it appears equities are the last man standing...

With the Treasury curve below Trump lows, Hard data below Trump lows, and even Soft data now collapsing back to reality, stocks seem to know only one thing - the $100 billion a month of buying from central banks better not go away anytime soon!

Is A Chinese Recession Imminent? Yield Curve Inverts For First Time Ever

While China growth has been slowing, and monetary conditions tightening, few (if any) have predicted any prolonged deflation (let alone a recession), yet overnight - for the first time ever - the $1.7 trillion Chinese bond market inverted, flashing a warning signal to the world that something is wrong.

Early on Thursday, the five-year yield rose to 3.71%, breaking above the 10-year yield for the first time since records began - even though the latter, at 3.68%, was near a 25-month high.

Some of the overnight weakness in the 10Y yield was eased by reports that PBOC would offer some Medium-Term Loans.

Of course it"s not just bonds that are getting dumped...

But, as The Wall Street Journal writes, such a “yield-curve inversion” defies normal market logic that bonds requiring a longer commitment should compensate investors with a higher return. It usually reflects investor pessimism about a country’s long-term growth and inflation prospects.

Perplexed traders and analysts offered up many excuses...

“Many of us are scratching our heads for an explanation because this kind of curve inversion is absolutely not normal,” said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages 2 billion yuan ($289.66 million) in assets.

“The inversion is a form of mispricing in the bond market,” said Liu Dongliang, senior analyst at China Merchants Bank . “The fact that no one is taking the bargain despite the higher yield on the five-year bond just shows how depressed investors’ mood is.”

“It’s really difficult to predict when the selloff or such anomalies will end because China’s bond market is reacting to the regulatory crackdown only and is no longer reflecting economic fundamentals,” said China Merchants Bank’s Mr. Liu.

But of course, the reality is - without massive and contonued credit creation, there are very large questions about just how "dynamic" Chinese growth could be and while technical flows are certainly part of the reasoning for 5Y yields rising, the question is, why wouldn"t the rest of the world pile in to "reach for yield"... unless the fundamentals really did have them worried?

Erdogan Poised For Victory Based On Early Referendum Results Although "Yes" Lead Is Shrinking

Update 4: 95.5% of the vote is in, and Yes is down to the lowest lead so far, 51.6$ vs 48.4%.

* * *

Update 3: With 93% of the vote in, Yes is down to just 52%.

* * *

Update 2: with over 75% of the vote counted, the "Yes" has 54.2% of the vote, versus 45.8% for the "No" and rising.

RESULTS: Turkish referendum, 76% counted.

Yes: 54.2%
No: 45.8%

— The Spectator Index (@spectatorindex) April 16, 2017

* * *

Update: it may be closer than expected after all, because as votes continue to trickle in, the Yes margin continues to erode, and with 61% of the vote counted, Yes is now at 56% versus 44% for No.

Turkey: Constitutional Referendum

If trend continues:

No (Hayir): 51.3%
Yes (Evet): 48.7%#Turkeyreferendum #Turkeyvotes pic.twitter.com/cbn82FT0SA

— Europe Elects (@EuropeElects) April 16, 2017

TURKEY: While "Yes" vote leads with 56% of the vote (61% counted), its lead has been falling gradually as votes have been tallied.

— The Spectator Index (@spectatorindex) April 16, 2017

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As previewed yesterday, on Sunday Turks voted on a referendum on the country"s presidential system whose outcome will likely place sweeping new powers in the hands of President Tayyip Erdogan and herald the most radical change to the country"s political system in its modern history. The package of 18 amendments would abolish the office of prime minister and give the president the authority to draft the budget, declare a state of emergency and issue decrees overseeing ministries without parliamentary approval. Effectively, Erdogan would become the closest thing to a despot possible in a "democratic" system.

For those who may have missed it, we urge readers to skim the preview, especially since the outcome appears to be largely decided, and according to Turkish media which appears to have broken the news embargo, with over 30% of the votes counted with a turnout of 87%, the pro-Erdogan "Yes" camp is set for a victory, as close to 60% of the votes allegedly support the proposed political system overhaul.

Turkey, 30% counted:

Constitutional Referendum

Yes: 61.8%
No: 38.2%#Referandum2017 #Turkey pic.twitter.com/zXqSWGezR6

— Europe Elects (@EuropeElects) April 16, 2017

First results from Turkey"s referandum,17.54 local time: 62.2 % YES, 37.8 % NO, with 29,1 % of votes counted https://t.co/9K9TQPY6Vs

— CNN Türk ENG (@CNNTURK_ENG) April 16, 2017

       
         

While we expect allegations of vote-rigging to emerge, especially in light of recent polls which showed a much closer margin between the "Yes" and "No" camps, we doubt there will be much political push from Turkey"s European "partners", especially since Erdogan still holds the trump card of releasing over 2 million Syrian refugees in Europe"s general direction should his now virtually supreme powers be disputed by Brussels or Berlin.

As for the market, as Barclays reported yesterday, it will likely take a Yes vote favorably, as it will mean little to no change in the Turkish political system.

As a reminder, from Barclays this is what a "Yes" outcome would mean for markets:

YES: A “yes” outcome would likely result in a broad-based, yet potentially short-lived, relief rally

Despite the market’s anticipation of a “yes” outcome, we think the associated reduction in near-term political uncertainty would likely still deliver some relief rally, allowing a temporary reprieve for the TRY and a steeper curve in anticipation of a “gradual” unwinding of tight liquidity policy.

In FX, still-large TRY political risk premia and undervaluation suggest room for appreciation following a “yes” outcome. While our estimate of the lira’s political risk premia has reduced from 15pp at the end of January, it remains relatively large at 8pp (Figure 6). Furthermore, our short-term Financial Fair Value (FFV) model suggests a 4% undervalued TRY against the USD (Figure 7).

We believe risk-reward argues for being long TRYZAR targeting January highs of 3.90 with a stop-loss at 3.67 for a reward to risk ratio of 3:1 (spot reference: 3.73). We prefer this to short USDTRY as South Africa’s similarly low risk-adjusted real interest rate differentials and heightened political risk should provide a degree of protection in the event of a “no” outcome. The trade also remains positive carry.

In rates, very low bond risk premia suggest a rates rally following a “yes” is likely to be concentrated at the front end of the yield curve as market participants will likely price a gradual unwinding of the CBT’s liquidity tightening measures. As such, we reiterate our existing trade recommendation of paying the 1s5s TRY cross-currency swap spread targeting -30bp with a stop-loss of -100bp.

For Turkey sovereign credit, we maintain our Market Weight rating. This balances our concerns about a likely medium-term deterioration of Turkey’s credit metrics in a presidential system on the one hand with relatively attractive valuations and likely reduced near-term political uncertainty in a “yes” vote on the other hand. In the near term, we see potential for further spread compression of Turkey against South Africa, especially in the 5y sector of the curve (Turkey ‘22s vs SOAF ‘22s), with South Africa remaining vulnerable to adverse developments.

In the corporate credit space, we also have a Market Weight rating on Turkish banks and corporates. In the case of a “yes” vote, we would expect bank seniors to benefit more than corporates given the more significant spread pick-up relative to the sovereign. Higher beta seniors trading at a discount of over 100bp to the sovereign as well as new-style Tier 2s yielding over 7% are likely best positioned to benefit, in our opinion, although this could be met with more Tier 2 supply. We would expect the opposite reaction to a “no” vote, with IG-rated corporates and more expensive bank seniors as well as old-style Tier 2s to be less vulnerable in any sell-off