Sunday, August 15, 2010

Nirvana of Totally Flat Treasury Yield Curve

Zero Hedge has a beautiful and the scariest 3-D chart I've seen of the US Treasury curve from 1990 to 2012 (projection). They think that instead of the current flattening of the yields of bills and notes shorter than 10-year indicative of the imminent fed funds rate rise (thus signaling the improved economy), it will lead to a collapse of yields in 10-year note and 30-year bond, rendering the curve totally flat.

Instead of signaling the economic improvement, the flattening this time is signaling nothing. The Federal Reserve's intention to remain the buyer of last resort for the entire curve has practically dislocated the market to the extend that it is not a market - free exchange of information - any more.

From the Zero Hedge article:

"Of course, it is now obvious what the Fed wants to achieve, as it gets ever close to using the last available nuclear option: outright monetization of every single asset class."

See the beautiful, calm, flat sea of Treasuries in 2011 and 2012. I don't know what to make of it. One of the reader comments in the article says it is like the ocean receding right before a huge tsunami. Maybe.

Or it is the end - flat-lining, as in the vital statistics of the dead being flat. A strange sort of nirvana where nothing sparks, nothing moves any more. Flat expanse as far as eyes can see, devoid of life.


Anonymous said...

FWIW: I think it will get much more turbulent by the end of 2012, as the recovery fails to gain traction and gov't debt piles sky high. Entitlment costs are soaring while tax revenues are falling.

We will likely have a short period of stability as economic hell arrives at other nations first. Already it has hit Greece and other eastern Europe nations. The smaller players are more vulerable. but it will work up the economic chain and land on us.

Well probably see another European debt\credit crisis this fall, China might also take a hit if the chinese gov't doesn't start stimulating soon.
US stock market will take a second dive as corporate gains from cost cutting begin to receed (they can only ring out so much from a wet shirt). Its doubtful any major new stimulous bills will be passed before November. Now that the stimuleous bills have been spent and state rain-day funds are gone, unemployment is rising again. Consumers are entrenching again and cutting back on spending. I think we will see another 100 to 300 pt dip on the SP500 this fall. Us Treasuries will make new highs (ie rates will tumble as a flight to safety by domestic and foriegn investors, and the Bernanke Put).

After 2012, it gets iffy. I am not so sure the US treasury rates will hold at such low rates. By the end of 2012 US debt will be around 17 Trillion or around 125% of GDP (if not worse).

arevamirpal::laprimavera said...

Thank you for your cheerful comment...

If Fannie and Freddie balance sheets are combined with the federal balance sheet right now, the debt would be already approaching $18 trillion.. But 79.99% ownership saves the government.

Certain countries seem to be able to sustain the debt to GDP ratio of over 100% for an extended time. Japan has done it. Great Britain did before. Currently, Singapore's debt to GDP ratio is 117%, and the country's 2nd quarter GDP growth was whopping 20%. These three countries (although Japan seems to be faltering) have one thing in common - they had strong exports.

The US is on self-destruction path. Already fighting three wars (Iraq, Afghanistan, Pakistan) and itching for two more (Iran, N.Korea/China). It's crazy. Almost makes me wish that ancient Mayans would be right on the money and the world mercifully ends on December 21, 2012.

Anonymous said...

Well at least the GSE debt has assets backing most of it. Perhaps if all of the assets (homes were sold) there would be a lost of a couple trillion in losses. For the federal debt on the books their is no real assets. Perhaps if the gov't sold off all its property and landmarks it would have about 3 to 5 Trillion, but I am not sure who would buy it, nor could the gov't sell itself off.

While the Occupation of Iraq is hard to swallow, but it is necessary that the US secure access to oil to keep the economony afloat. Global oil production is in terminal decline and the US economy is utterly dependant on cheap oil (as well as the rest of the industrialize world). Iraq has enough oil to supply the US for another decade. Although I am not sure if the US can continue to support is vast miltary network over the next decade. I think Us overseas operations will be culled in order to pay for domestic needs and perhaps to provide domestic security as the ranks of unemployment grow resulting in a rise of domestic civil disobedience.

I will agree with you on Afganistan, since the US has no stratigic interest there. Pakastan has nukes, We should have kept Musharraf in power since he was able to hold the country together. At the very least we should have worked with him to remove the nukes before he left office. Pakistan is falling into anarchy. there is a very high risk of its nukes being sold off to a terriorist network or used in a conflict with India. Pakistan is a power key readly to to explode.

Iran is another loose cannon. Iran is building 10 large Uranium processing plants and only has one (semi-operational) nuclear power plant. It like building a large scale refinery capable of producing fuel for hundreds of cars, but its only servicing one vehicle. I would believe Iran if it had been building ten nuke power plants and one Uranium processing plant. Its highly likely that Iran has convert plans for its enriched uranium. Iran has tight connections to many Islamic terrorist networks that could deploy nuclear weapons almost anywhere. For instance Iran could ship a nukes to south america to its connections there. Then hijack a US flagged Yachts and sail into major US port cities and detenate them. Imagine if all the major US ports along the east and west coasts were nuked on the same day. Iran also risks miltarizing other gulf states, since non of them trust Iran either.

I am all in for the US to pressure China into dealing with N. Korea. If China wants to be a world power than it needs to step up and start dealing with N. Korea. China has just as much to loose if N. Korea goes to war. It would be nice if other major players stepped up to serve as the worlds policemen. The US is no longer strong enough to serve as the sole policeman.

FWIW: My current projection is that world collapses in about 12 years (+/- 4 years), as Oil depletion, over-population, aging populations in the West, and excessive sovereign debt takes it toll. Break up of the US will happen in the next 4 to 8 years. Too many problems not enough time to correct them, and nobody wants to fix them either. We are a herd of sheep headed for the cliff, and the herd doesn't see the cliff head, nor does it want to change direction.

arevamirpal::laprimavera said...

"For the federal debt on the books their is no real assets."

Oh, it just dawned on me. Those "real assets" are us, aren't they? We are indentured servants to the debt holders!! And half of the debt is owned by the US government itself. Uggghhhh.

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