Treasury Spasms

As Bill Gross has been more than happy to demonstrate on several recent occasions, the recent sell off in US Treasurys has been sharp and violent, wiping out all year to date capital gains in the 10 Year in a few short weeks. The flipside to that is that this is not the first such headfake in the bond market, and it certainly will not be the last as David Rosenberg shows today with a chart summarizing all the “spasms” experienced in the 10 year Treasury since 2007. In fact, based on the average duration and move severity, the 10 Year sell off may not only continue for twice as long (on average it has been 49 days, and we are only 19 days in in the current sell off episode), but the final tally may be a further selloff well into the 2% range (the average decline in yield is 88 bps, double the 43 bps widening to date). At the end of the day will it make much of a difference? Very likely not: after all the deflationary implosion has far more to go before all the central banks
engage in coordinated easing, and as a result superglue the CTRL and P
buttons in the on position, leading to the final round in the global
currency devaluation race.

Rosie’s summary:

Of course the Treasury market would sell off in this backdrop, and the 10-year note yield has already moved up more than 40 basis points from its nearby multi-decade low.


It was overbought then. It is oversold now… which is why it successfully tested the critical support around the 1.87% level late last week.


But let’s not pretend we haven’t seen these hiccups before. We have had no fewer than eight such episodes of 40+ basis point spasms since yields peaked in the summer of 2007. Each one did not last long and presented a gift of a buying opportunity for patient investors who have an ability to see the forest past the trees. Typically, these hiccups last 49 trading days and the yield rises an average 88 bps, with about three-quarters of the prior rally being reversed.


So can this last another month? Recent history says yes.


Can we see a move to the 2-2.25% band during this time? Recent history says yes.


But is this anything more than a blip in what is still a secular bull market in bonds? Again, recent history would say yes.

Finally, the definitve signal to go long the bond again will be just as Goldman says to short it, which as readers will recall, is precisely what happened the last time Goldman said it was a once in a lifetime opportunity to sell bonds and go long stocks. We all know what happened next.

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Guest Post: Be Optimistic (And Wrong) About The Chinese Economy

Submitted by Zarathustra of Also Sprach Analyst,

When China started tightening policy to fight inflation, almost no one thought that it would slow the economy to what China is in right now.

When China started imposing ever more aggressive real estate prices curb, some people believed that that it would not make home prices drop (because there are many people in China, and urbanisation, etc), and even less believed that it would slow the economy to what China is in right now.

When China started to slow down more than most thought, almost no one thought that it could be a big problem, while some thought that the slowdown was “engineered” to fight inflation.  Because it was an intentional slowdown, not many people believed that it could get much worse.

After China’s shadow banking sector started blowing up, there is a bloke call Andy Rothman from CLSA who said there are “no shadow banks” in China.

After the slowdown “intentionally engineered by the government and the central bank” became consistently worse than expected probably since the start of 2012, consensus calls for recovery of growth in the next quarter.  They call the same thing every quarter since then, because there is “much room for policy easing”, “much room to manoeuvre”, “can cut rates”, “can cut RRR”, “can use US$3.2 trillion FX reserve”, etc.

After Wen Jiabao announced this year’s growth target at 7.5% in real term, most thought that China has never not exceeded the growth target, so GDP growth will most probably be above 8%, said the consensus.

Many have been denying emphatically the possibility of a hard landing.  Some like Qu Hongbin of HSBC even wrote that there is “no risk of a hard landing”.

So now, what do we have?

FT wrote that even 7.5% growth target looks “ambitious” to some.

On the whole, except that the real estate market is holding up better than we thought it could (yes, we did get that wrong, although we are not changing our view), the economy has been doing quite consistently poorer than the consensus, and occasionally even worse than what we thought to a point that at one point we thought we were not bearish enough, even as pessimists. 

Although real estate market is holding up better than expected, real estate companies’ profits have collapsed as expected and some overstretched speculators are facing negative equity.

Meanwhile, more and more risks from the shadow banking sector is surfacing, even in the formal banking sector.

Inflation has eased to a point that besides food prices, deflation is now a bigger risk.

Although the economy is not quite in a hard landing yet in terms of GDP growth (that is if you believe those numbers), for many companies and employees, it already feels like one.  For instance, Dong Tao of Credit Suisse painted a very grim picture:

It is evident that about 30-40% of manufacturing companies have closed doors or are considering closure in Guangdong and Zhejiang provinces, two of the largest export hubs for China.

Despite apparently high GDP growth, most had to learn a hard way in the past 2 or 3 years that stock market returns and GDP growth are not that correlated after all.  In fact, Chinese stock market has been destroyed.

The majority of people have consistently been too optimistic about China for the past year or two.  Digging deeper, we have not found much good reasoning behind those who insist on the uber-optimistic case, and most bullish arguments can be boiled down:

This is China.  China is different.  Don’t ask, just buy.

This is China. The government is omnipotent; the central bank has much room to ease policy, and has US$3.2 trillion FX reserve.

It is this common belief about the ability and willingness which makes those who were too optimistic too optimistic.  Being an optimist on China’s economy has been wrong, at least for the past year or so.

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In The Aftermath Of The Greek Blue Light Precedent: Belize Demands Half Off On Its Debt… Or Else

“Greece set a precedent for ‘Here’s what you’re going to get, take it or leave it'” is how the WSJ summarizes an analyst’s ‘shocked’ thoughts on the growing game of ‘call my bluff’ being played among beggars being choosers. Belize, a Central American nation with an economy the size of Pine Bluff, Arkansas, is surprise surprise running out of money to pay its debts and is insisting that creditors forgive 45% of what they are owed – OR allow it to delay any debt payments for 15 years (yes, seriously, read that again) – leaving a default on the country’s $543.8mm almost inevitable.

Three things stand out to us: 1) the nation’s government simply posted a note on its website that it would be ‘skipping a payment’ as opposed to telling creditors directly; 2) none other than ‘Long GGBs are the slam-dunk trade-of-the-year’ Greylock Capital are “mystified” that yet another trade has gone pear-shaped adding that they are “sure every country could benefit from not paying their debt but this isn’t the way to do it!”; and 3) this would be one of the worst restructuring terms ever as the “Greek effect” could inspire other countries to pursue restructurings on more favorable terms – especially given that: “Even if you don’t need a restructuring you can force one upon bondholders because it’s so hard to recover money from a sovereign who won’t pay,”



From the WSJ:


Prime Minister Dean Barrow in a March television interview said the global 2029 bonds, issued by a different administration, had come at too high a price.


The bond’s interest rate rises over the course of its life, reaching 8.5% for the August payment, from 4.25% in 2007, when several loans were consolidated into a single bond.


…[preventing] the current government from using “our recurring revenue to do more for the people, to push employment and to push job creation,”


… triggered a sharp selloff in Belize’s bonds, driving yields higher. The yield peaked at 30.2% after the restructuring proposal earlier this month, from 16% at the start of the year. The bond yielded 26.3% on Friday.


Roberto Sanchez-Dahl, an emerging-market portfolio manager with Federated Investors, said…


“We thought that the probability of the government being bond friendly was going to be low, given [Barrow’s] rhetoric of pushing against foreign holders [that] resonated very well domestically,” Mr. Sanchez-Dahl said. “They would definitely not give priority to foreign investors, or put them in front of domestic needs.”

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The Growing Threat Of Soybean-Inspired Social Unrest In China

Two weeks ago we explained why the drought-inspired soaring price of Soybeans  – specifically from the US – would notably influence global central-planners’ actions – and more specifically the Chinese (given its high impact on food price inflation). Food prices remain elevated and the PBoC is undertaking Reverse Repos – the exact opposite of an RRR-driven easing program so many expected. However, there is a further, deeper, and more troubling consequence than ‘simple’ inflationary arguments – that of social unrest. Confirming our insight, the LA Times points out,

Soybean oil is the most important edible oil in China with more than two-thirds of cooking oil consumed in China coming from soybeans – and most of those soybeans are supplied by the US (more than half of US exports are to China and the US is China’s number 1 supplier). According to one official this “makes [China] vulnerable to the drought” and bound to the fortunes of farmers in the American heartland. The Chinese devote more than 20% of their income to food (three times more than Americans – according to the USDA).

This means the dramatic rise not just in grain prices, but in the up-stream prices of meat, eggs, and milk combined with the until-now newly affluent (un-dirt-poor) Chinese have grown transitorily-used to an “everything needs oil” attitude when spending and this price-jolt to newly entrenched tastes is why authorities are concerned about social stability; as IHS points out “Inflation has a long history of sparking discontent, so obviously it’s on the forefront of the Chinese leadership’s mind.”

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