Now THIS is Getting very Troubling
Today there is another flood of money being put into US treasuries driving yields further downward. In the case of the 10 year yield ($TNX) it is now below a multi-year channel. It is possible that this will be an ‘overshoot’ (well, in this case a whipsaw undershoot from the channel). But, if this trend continues then this gets very troubling.
The shorter end of the curve has yields trading at essentially zero. Who, and more importantly, why is so much money being placed into the safety of treasuries? There is an almost panic level buying of treasuries sending the yields down. I really want to know who is piling so much money into the safety of the bond/treasury market instead of equities.
This kind of a rapid move of money into ’safety’ signals something major is about to happen, at least that is how someone out there feels. Some have suggested that this is direct buying of treasuries by the Government to drive down interest rates intentionally. I remain skeptical until I see some real evidence of that.
If this buying into the ’safety of treasuries’ is Wall Street money then there is a growing fear of worsening conditions to come. This deserves to be watched VERY closely in the days and weeks to come.
It is simply a hedge against margin calls.
Chip.. It takes a LOT of $$ to drive rates down by that amount. I can’t see this being simply a hedge.
Chuck…
I noticed your screen shot is from prophet chart. Are you using thinkorswim? If so, how long?
Neo.. Yes, I use Think or Swim. Have been using it for close to 6 months now.. love it.
Chuck, Do you have any experience with trading based on the Market Forcast study for an individual stock. I know the market forcast works great for the indexes but have no experinece with it on an individual stock. I have been doing some searching and found several stock that are about to cluster and a few that clustered today/yesterday.
Chuck, I have little reason to think these thoughts for myself, but refer to someone who does. In his “Thoughts from the Frontline Weekly Newsletter”, John Mauldin writes this-
“In the last few weeks we have seen 30- and 90-day US Treasury bills trade every now and then at a rate of negative interest. That means someone is willing to pay for the privilege of having their cash in US Treasuries. This simply should not be. Why would anyone want to do this? Is this a sign the system is broken? Are we that scared?
Not really. There are some explanations for this seemingly bizarre behavior. First, banks are driving down the interest rates toward zero. Because their audits come at the end of the year, they want to be able to show a very liquid and pristine balance sheet. And what better way to do that than short-term US Treasuries? But that gets us near zero, not below. (And as noted below, the effective Fed funds rate is at zero, not the posted 1%.)
As David Kotok of Cumberland Advisors noted in a post: “We cannot find a single investor or institution or organization that would volitionally buy this T-bill at zero interest, let alone a negative yield. We have polled firms and agents and portfolio managers. We’ve asked people who range from sophisticated, high-net-worth individuals to multi-billion-dollar institutions. None would do it. We have asked professionals and skilled and trained consultants. All answer ‘not me.’ Foreign currency traders would not do this trade; they have other ways to hedge or structure without buying a negative yield.
Another possibility is market manipulation or a pricing error. Not this time. All evidence points to the negative yield as seeming to be a market-driven price. This is a real puzzle on the surface.”
I have spent more than a little time over the years looking at alternative fund prospectuses and back-room operations, and have been involved in a consulting role for a few funds. Let me tell you how I think interest can get below zero in a perfectly rational market.
Let’s say you are trading futures or other leveraged products. You don’t need to put up all the money in order to buy a futures contract on oil or the S&P 500. You simply have to have a typically small amount of margin money at the clearing broker, depending on the nature of the contract. Many funds are required by their organizational documents to hold their cash in short-term Treasuries for liquidity purposes. They have no choice but to buy Treasuries. Some of these funds are quite large, and when they come to the market they come, as we say, “in size.”
If you are a trader on the other side of the trade and can make a little extra for scalping such a fund, then you do it. It doesn’t happen often, but it can and does happen when the demand for liquidity is as high as it is today.
I also called my long-time friend Art Bell, whose eponymous firm Arthur Bell and Associates audits a rather large number of commodity and hedge funds. He is one of the best in the business. He confirmed that he knew of at least one fund that had bought Treasuries at a negative interest rate, not because they were forced to but because they wanted instantaneous liquidity in case they got margin calls on some of their trades. They did not want to be forced to sell something at a larger loss than they would normally take, just because they did not have the cash. The very small negative interest was the price they willingly paid not to be put in the position of taking larger losses on a trade in a forced sale. Sounds like smart risk management to me.
I bet if we checked around we would find more than a few funds and managers who for one reason or another are willing (or forced to) buy Treasuries at negative interest rates. Such is the way in today’s surreal investment world. Art says that if this current environment persists, funds will find an alternative, such as third-party collateral deposits, rather than leaving deposits at a brokerage firm.”
Posted by permission contingent on including this statement:
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
I apologize for the length of the quote, but I felt full context was necessary for clarity. Therein lie my quick-off comment about hedging against possible margin requirements.
Merry Christmas! ChipSeal