Murmurs From the 10-Year Note

What happened? Just a few weeks ago, we were worried that the treasury market was becoming a "black hole" that would soon suck in all financial assets. Instead, rates have reversed significantly. What does this mean and what does it portend?

First of all, here's where we were back in late July. The 10-year note had just fallen through 1.40% and it had everyone's attention: http://www.tfmetalsreport.com/blog/4046/two-things-my-mind. Here we are, 3-4 weeks later, and were at 1.82%. That is a HUGE move! What the heck happened? I think I have an answer but, first, some background.

Take a look at these two charts. One a is daily 10-year and one is a weekly. Note that the current price of the 10-year is 132.50. This is important because the area around 132 appears to be very important support. You can plainly see horizontal support on the daily chart but, looking at the weekly chart, 132 is also near the trendline from the lows of late spring 2011. Breaking that support and that trend would set a top and would foreshadow a move to 127-128. Now, look at the weekly chart. Notice that 10-year prices have been in a very long term up channel. Then notice that the past three Fed "programs" have been initiated when prices were near the top of the channel.

So, what is going on? Why the sudden dropoff in price? I think I have the answer. I posted this presentation yesterday. You may have already watched it. Watch it again and stop it right at the end, near the 57 second mark.

Simply put, The Fed is out of bullets. The goal of "Operation Twist" was to create demand for the 10-year and the 30-year, thereby keeping rates low and in a downtrend. They accomplished this "sterilized" program by selling their short-term bills and notes and using the proceeds to buy longer term notes and bonds. Now, look at that final frame again. The Fed is now out of paper to sell. Their current holdings in the 1.5 year and less range are negligible. Therefore, they have no more ammo. Now look again at that last frame. The Fed now owns nearly 70% of the outstanding 10-year note inventory. They are that market. There is hardly anyone left besides the Fed and the Fed is out of cash to keep it going. Suddenly, we have a simple imbalance of more sellers than buyers and...down goes price.

Notice what I said above, "the Fed is out of cash". Like athletic momentum or alcohol-induced desire, this is but a temporary thing. Let me state this clearly again: THE FED CANNOT AND WILL NOT ALLOW RATES TO RESET HIGHER. THE RESULTING BURDEN OF HIGHER INTEREST COSTS ON THE ALREADY ACCUMULATED DEBT WILL ONLY SPEED THE DEMISE OF THE PONZI AND THIS CANNOT BE ALLOWED. Therefore, with rates backing up and with the Fed out of liquidity to support a turnaround, the only option left is a re-ignition of overt quantitative easing.

Will this announcement come from Jackson Hole? Will it come from the next FOMC meeting on 9/12-13? Will it come at the following meeting of 10/23-24? It's impossible to say but what is possible to say is this: Watch the 10-year note. It will tell you.

One more thing for which we must be on guard. Look again at the 10-year daily chart. Do you see the sharp drop in price back in early March. If memory serves me right, wasn't that drop blamed for the demise of the JPM "London Whale"? Didn't everyone conclude that that particular, 4-point move in the note caused a derivative loss for JPM to be somewhere between eight and ten billion dollars? Well, since late July, the 10-year has dropped 3 points. I wonder if any of The Fed's primary dealers are feeling a bit of a pinch right now? Something to think about, that's for sure.

Now, before we get ahead of ourselves, we need to examine the Long Bond and The Pig for confirmation. Their charts are clearly rolling over but, unlike the 10-year, they are not in imminent danger of breaking trend. They must be watched closely, though, as a further break down in each will only serve to apply even more pressure to the 10-year note.

OK, just a couple more things and then I'm taking the rest of the weekend off. First, yesterday's CoT was very interesting, particularly in silver. Before jumping to conclusions, I'm going to wait to see what Uncle Ted thinks of the disaggregated report. In the meantime, here's a C&P of my comments from yesterday afternoon:

Submitted by Turd Ferguson on August 17, 2012 - 2:59pm.
MODERATOR
I had expected gold to be a non-event and it was. For the reporting week, price fell $10 and OI only fell by 67 contracts. The only item of minor note was the 2,478 net drop in The Gold Cartel net short position which brings their net short ratio back under 2 at 1.98:1. Again, this is historically low and very bullish.
The action and the intrigue is in silver. For the reporting week, silver fell 32c but total OI rose by 4700. Obviously, there was a lot of new buying and selling going on. The question was/is: Just whom was on each side? Well...whaddayaknow...it looks like we have a civil war starting in silver.
For the week, The Silver Cartel total long position grew by 3,202 contracts. This is likely the silver "raptors", as Uncle Ted likes to call them. However, The Silver Cartel total short position also grew by 4,752 contracts. This is likely JPM but I'll wait to see who Ted fingers in his report tomorrow.
I've never seen a Silver Cartel long position this high before. Never. Maybe it has been but I sure as heck don't remember when. For perspective, on 2/28/12 it was 33,802 and on 4/20/11 it was 34,043. Nearly identical levels before sharp beatdowns. On 12/27/11, just before a 2-month, 20% UP move, the total long position was 41,224. Now it's 47, 797!
Similarly, the total short position is unusually large. The last time it was this high was on 3/6/12, just after the peak and subsequent beatdown of late February. In the recent past, it has been as high as 89,827 on 4/6/11 and as low as 55,356 back on 12/27/11.
At first glance, we appear to have the makings of a civil war. Instead of acting collusively, the smaller banks seem to be buying and thus attacking the short position of JPM. To contain price, JPM is being forced to issue new paper independently. Again, this is how it appears. Let's wait until Uncle Ted dissects the report before jumping to any more conclusions.
Perhaps the smaller sharks smell blood in the water. Maybe they sense the opportunity to trap JPM on the short side and squeeze the daylights out of them. Could these banks be expecting an historic, hot and explosive move in the weeks ahead???

And then there's this. While researching this post, I came across this video from March 19th. I don't know who this Ilcyzsyzn guy is but, right now, he looks like Nostra-freaking-damus! Hopefully, he's made himself enough money over the past six months that he can buy himself a couple of vowels.

http://finance.yahoo.com/blogs/breakout/wait-gold-bottom-1525-ilczyszyn-202824187.html

I hope everyone has a great weekend. Relax and prepare mentally for everything that is soon to come.

TF

287 Comments

phanophite's picture

first

first

thurd aye's picture

silver >?>>

oh dear I seem to have wet myself to get a medal.Sorry folks.

I like silver better than gold anyway just at the moment. ;O))

Dagney Taggart's picture

So when do....

the rates go negative ala. Switzerland?

peckerwood's picture

somehow relevent

c'mon, its Saturday.  oh, 3rd

edit: sorry for the off topic post.  i did not read much of the last thread, because it was getting nasty again.  can't we just be civil?  why is the above relevant?  we are a family.  we all know something big is about to happen.  none of us truly understand it all.  we need to be extra tolerant.  we are on the same side.

¤'s picture

Not sure what forum to go to?

Thanks for the update TF. yes

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

 

Not sure what forum to go to?

 
 

Consider going here and keep the debate and idea's flowing. Its one click away.enlightened

http://www.tfmetalsreport.com/forum/4100/white-room-wblack-curtains-watchtower

As some of you know I started that forum the other day to address something entirely different. I've moved on from that and I believe the site has as well. My original intention was to use that thread as a topical clearinghouse for posts or topics on this main page to be able to go to if anyone was unsure what forum or thread to take it to. (There are almost too many threads to find the 'right' one quickly enough).

I'm headed over to that thread soon to start posting whatever it is I want to that doesn't seem topical to any of the threads I have going in the Frivolity Forum or elsewhere on here. I would ask anyone to consider going there with anything that seems like a 'hot button' and just continue it over there. It's one click away and can serve as a quick outlet to resume the passionate debate no matter what the subject is. Everything under the sun is fair game.

It might be easier to go there sometimes then a Mod or TF coming on and saying "Please move it to the forums". I have more to say about that thread over there. Please ignore the first post because it's no longer relevant and I'm looking to get that first page over with and onto page 2 to keep that thread on track to what I think it could become.

A place to discuss anything from here that you aren't sure where to bring it. Consider it a hallway off the main thread that you can step aside and into. It's what the site wants anyway as far as 'hot button or off topic comments. Remember, anything goes. Any subject whatsoever.

Hope to see you in... A White Room w/Black Curtains @ The Watchtower

http://www.tfmetalsreport.com/forum/4100/white-room-wblack-curtains-watchtower

TheGoodDoctor's picture

Hey how has everyone been?

Hey how has everyone been? Been reading the boards but not posting much.

I still think there will be a beat down in the metals before the election and QEIII. With the talk of releasing more oil from the strategic reserves as well, they will try to get commodities to take a dive again only for the short term until the election. Got to make things look good for the election you know!

boatman's picture

iran isreal

the escalating syria fighting makes an isreali strike more possible due to hezbola losing support from assad and hez not  wanting to shake up their support in lebanon.

hez has enough rockets to melt isreal .........that is their main concern of retribuition.

not even obozo would be able to decry a strike around convention time.

65-70% chance of a strike before election.   

SV's picture

Free Silver Mercury Dime

Sign up at the forums of the Silver Liberation Army and bring down the banking-industrial-military-corporate complex and win a Free Mercury Dime!

http://silverliberationarmy.com

¤'s picture

Historical UST Price Charts

Historical Perspective

U.S.%2BTreasury%2BBond%2BInterest%2BRate

From January 2010 to Present

United States Government Bond 10Y

From January 1912 to August 2012

Historical Data Chart

Admiral Ag Bar's picture

Thanks Turd!

Great post!  I patiently await the demise of JPM!

maravich44's picture

JPM trouble ahead,trouble behind

I think that Jamie is in it way deep, and will be sacrificed, he is too arrogant to see this coming, he is a low level player in the grand scheme. 

Missiondweller's picture

Turd, one of your best posts

Very insightful. Thanks for pointing out what I missed. I hope people reading this will understand its importance:

  • The FED is out of bullets without more OVERT QE.
  • Higher rates may be crushing Primary Dealers (possibly a tipping point going into Fall)

Most important, THE FREE MARKET IS RE-ASSERTING ITSELF and is overpowering Fed actions.

peckerwood's picture

yup

30 years of bond bull.  the last few years have required Herculean effort by the FED.   retirees just don't get it - like my Dad.  he thinks he will have time to move his money before the storm hits.  millions are going to have their life's savings vaporized.

i used to post a lot on the JPM YeeHaw board.  i liked to end my rants with this...

see ya in hell Blight, and bring my (expletive) silver. (addressed to Blythe)

but now i think i'll just let the wench keep it.

Maravich - weren't you thinking of the Dead, Casey Jones :-) 

maravich44's picture

peckerwood,

yes. Please stay around, I enjoy your company. 

alphamorph's picture

Outperforming Congress

Marc Hujer of Der Spiegel had  this to say on Aug17/2012

“The current Congress, the 112th in US history, is the most unproductive since the end of World War II. It enacted only 80 laws in 2011, fewer than any Congress has done since 1947, despite the great need for reform and the ongoing budget crisis. The US Congress has failed to achieve a united position on the war in Libya, climate change, immigration, tax policy, reforming the country's social welfare systems and other important issues of the day. The Joint Select Committee on Deficit Reduction failed.

My wife suggested that their pay be cut accordingly to which I replied, "Ya, we'll all pull up a picket off the fence (for placard construction), pile into our pickups and head for Washington where we'll be greeted by the most heavily armed (and militarily trained) police force in the history of U.S..   For icing on the cake, it appears they've been doing a lot of riot preparation lately. 

Or…. I can simply curl up with the old girl in front of the ol’ big screen, watch reruns of Starsky and Hutch and scoff down a big plate of French fries smothered with (RonnieR’s favourite vegetable), ketchup.

clueless one's picture

couple of good videos...

hope you enjoy...but more importantly, learn something.

tyberious's picture

Silver Set to Rise by 15%-25% by December

http://www.ftmdaily.com/audio/pmmu-081812.mp3

Major suppliers are reporting that massive buy orders have been placed on 100 oz Comex silver bars which could send silver prices soaring by $2-$4 per ounce in a very short period of time. Tom is declaring both gold and silver in an “all buy” mode. Tom expects to see even more gold buyers strongly entering the market by the close of business next Wednesday. He also expects much of the shorts in the market to dissipate by the middle of next week as we head into the biggest buying season of the year for gold and silver.

The Indian harvest season, the Chinese New Year, and the coming U.S. fiscal cliff are all set to drive prices higher and the U.S. dollar lower. In fact, over the last 11 years, the U.S. dollar has faced strong headwinds in the month of September because of the massive U.S. deficits.

The writing is on the wall as both major hedge fund managers and central banks are buying gold in large, even record, amounts.

By the end of the year, Tom expects silver prices to rise by 15%-25% and gold to rise by 10% or more.

tyberious's picture

Good Stuff

Great investigative analysis Turd!

Mr. Smith's picture

A leveraged wager on the miners

Xty's picture

nothing new(s), but relevant:

TREASURIES-U.S. debt prices edge up, FOMC minutes in view

LONDON | Fri Aug 17, 2012 2:56pm IST

Aug 17 (Reuters) - U.S. government bond prices edged higher on Friday as buyers crept back into the market after a steep fall earlier this week pushed yields up to levels that proved attractive to some.

* U.S. debt sold off in the first half of the week after economic data beat expectations and prompted some players to push back their estimate of when the U.S. Federal Reserve will resume buying bonds to lower rates and stimulate the economy.

* However, that move hit technical resistance when 10-year yields rose to 1.86 percent, just shy of the 200-day moving average. Since then investors with a negative medium-term outlook on the U.S. economy and health of the euro zone have bought back in, driving yields down to 1.83 percent.

...

http://in.reuters.com/article/2012/08/17/markets-bonds-treasuries-idINL6E8JH4LZ20120817

exiledbear's picture

I remember saying something around that time frame too

Like hold on, just hold on.

Bottoms are never obvious. And even if you're past a big bottom, it's not obvious until weeks have passed or maybe even months. Everything is crappy, it's not doing anything, always looking like it might break down again.

I do remember that $700 gold call that SGS posted on his site though. And if you have to call a bottom, probably whenever that call was made on Yahoo, that was the bottom of this bear interlude. That's pessimism that's way beyond what the price level is telling you.

I think we're setting up for a nice September, which would be in line with the typical yearly gold cycle. A dull summer, with everyone ramping up in the autumn for their weddings and xmas.

Meanwhile BTC gave up some handles - from the $14 handle it's back down to the $12 handle. But like with gold, I think anything that's not-dollars will do well. Doesn't really matter what it is, as long as it's tradable and will hold its value.

I do sorta expect the gubmint to try to screw us. I mean, they're not playing fair now, what makes you think they're going to all of a sudden start playing fair in the future? For us, things are going to get very tricky and complicated. But I'd rather deal with these kinds of problems than have to deal with not being able to afford anything at all.

SteveW's picture

Financing tfmetalsreport

I've had more time to consider Turd's disclosure of his financial situation and his underlying desire to freely provide the tfmetalsreport website. Basically I take that to mean that he wishes his commentary to be freely available.

So I suggest that while his daily report should remain free, all of the user content be available on a subscription basis (say $5-$10 monthly). Since regulars form a community and benefit from the input, views, discussion and links provided by the community this seems to be fair. In this way we, as a community, will support the website both financially and in providing content.

Dr. Sandi's picture

Bottoms

Hey Bear, I disagree. If you say bottoms are never obvious, you've never seen J Lo leave the stage.

But seriously, my long term fear isn't that I won't be able to afford anything at all. My concern is that there won't be anything at all to afford.

exiledbear's picture

You're right I haven't seen J Lo

And I don't plan on it either. There's only so many trivial things you can do in a given day. I'd rather waste my time in other ways.

tyberious's picture

J Lo

I could waste some time on her #$%%^&&&.

Puck T. Smith's picture

@Really-

Quote:
With all due respect, do you really think people with common sense are going to pay money to...

I'm having a hard time seeing how this kind of comment is contributing to things, either.  If you have an issue with something someone says you might want to try refuting it if you can, but just calling names is only doing more of what you accuse others of doing.

¤'s picture

UST's from 1871- 8/17/12 CBO Revenues & Outlay%GDP

CBO_-_Revenues_and_Outlays_as_percent_GD

10 Year Treasury Rate Chart

Current Rate: 1.81% -2.00 bps
At market close Fri Aug 17, 2012
Mean: 4.54%  
Median: 3.85%  
Min: 1.43% (Jul 2012)
Max: 15.32% (Sep 1981)

US 10 Year Treasury Yield.

Purplefrog's picture

Vowels

"Hopefully, he's made himself enough money over the past six months that he can buy himself a couple of vowels."

Too funny.  I'll be chuckling about that for the rest of the day.

Purplefrog's picture

Too many laws already

I like for con-gress to do nothing.  It's better than what they have been doing.

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