Unstoppable Negative Yields Suddenly Become Stoppable

Snapback Bloodletting in the Overripe Bond Market.

This is the transcript from my podcast last SundayTHE WOLF STREET REPORT:

OK, so we’ve got ourselves one heck of a snapback in government bond yields, not just in the United States, but globally. And the negative-yield mongers that were out there for months, preaching their book and prophesying near-zero or negative yields even for the 10-year US Treasury – this includes hedge funds with algo trading strategies – they’re suddenly facing steep losses on their highly leveraged bets because yields have snapped back viciously.

The 10-year Treasury yield closed on Friday at 1.90% [Sep 13]. This was up 43 basis points, or close to half a percentage point from eight trading days ago, from September 4, when it was 1.47%.

When bond yields rise, bond prices fall by definition. For the 10-year yield, a 43 basis-point jump in eight trading days is massive. It was right there with the other three snapbacks since the Financial Crisis, and proportionately speaking, it was the largest in the data that I looked at through 2007.

But none of these snapbacks ended after eight days. They continued on average for five months, with 10-year yields rising 120 to 170 basis points. A classic snapback like this would nearly double the current 10-year yield.

How massive was the snapback over the past eight days, compared to the prior ones? Ok, let’s see:

  • It was just about as massive as during the last snapback in 2016, when during the worst eight-day period, yields had risen 46 basis points.
  • It was just about as massive as the 46-basis point jump during the worst eight days of the Taper Tantrum in 2013.
  • And it was nearly as massive as the 58 basis-point jump during the worst eight days in late 2010.

These vicious snapbacks are not uncommon. They occur when some clamorers in the market manipulate up bond prices as hard as they can, and thereby manipulate yields down, and create a lot of momentum behind the 10-year Treasury, and then suddenly, they run out of steam and they try to unwind their complex bets, and bond prices fall and the yield snaps back.

But the current snapback is proportionally-speaking steeper than the others, given how low the yield was in early September when the snapback began. In percentage terms, the yield jumped by 29% in eight trading days — in other words, it’s almost a third higher than it was eight days ago.

  • In 2016, the worst eight-day snapback maxed out at 25%.
  • In 2013, during the Taper Tantrum, the worst eight-day snapback maxed out at 21%.
  • In 2010, the worst eight-day snapback maxed out at 20%.

10-year yields lumber down an uneven staircase, but when a snapback occurs, they go up by express elevator. This was a vicious snapback by any measure – and a well-deserved one because these negative-yield momentum folks had set themselves up for it.

These yield snapbacks are so essential and so inevitable after these mega efforts to push yields down that even I knew there would be one – and I said so in my podcast on Sunday, September 1, with the transcript being published on September 4.  It’s not that I knew that the snapback would start a couple of days after I published my podcast. I didn’t. But snapbacks are common, and they’re inevitable, and the market was totally overripe for one. And the most overripe markets get the juiciest snapbacks.

But the thing is, these classic snapbacks don’t last eight days. They last for months.

The snapback that started after the 10-year yield had dropped to a historic low of 1.37% in July 2016, lasted five months through the end of the year, pushing the yield up by 120 basis points.

The snapback of 2013 – the Taper Tantrum – started in May and lasted five months into September. It pushed the 10-year yield up by 130 basis points.

The snapback of 2010 started in October and lasted over five months into early March 2011. It pushed the 10-year yield up by 170 basis points.

If this snapback follows the pattern of prior snapbacks, we’re looking at something like five months of rising 10-year yields, more gently than in the past eight days, with sharp ups and downs, but rising overall, with the yield going to something like 2.7%. And that may be the optimistic scenario.

Why optimistic? Because never before has there been such a huge massive and idiotic bond-market bubble globally. These bubbles can last a lot longer and can go a lot further than anyone with a rational mind can explain, but they don’t last forever — never have, never will. Along the way, the US yield curve would un-invert, and steepen, and it would start to look normal-ish again.

Globally, during the peak of this negative-yield craziness at the end of August, there were $17 trillion – trillion with a T – in negative yielding bonds outstanding. Meaning these bonds traded at such a premium over face value that if you bought those bonds at the time and held them to maturity, which might be 10 or more years, and you add up all your coupon payments plus what you get for the bond when it’s redeemed, which is face value, you’d lose money.

And this is just the nominal loss. Considering that there is persistent inflation, even if it is not huge, the real loss adjusted for inflation over this long a period is far larger. It’s absurd to hold “investments” like this.

Folks buy these absurd instruments basically for three reasons:

One, you have to buy them because you’re a pension fund or an insurance company, or a bank, and you have to fulfill rules and regulations that require you to hold a certain percentage of your assets in your country’s government bonds, no matter what the yield, and no matter how it will wipe out your beneficiaries.

Two, you want to sell the bonds at an even lower yield, and therefore even higher price, shortly after buying them, to an even greater fool.

Three, you want to use them for complex, highly leveraged, highly risky bets whose real risks no one understands, or wants to understand, and for which you want to use other people’s money, and when these bets blow up, they will take down squadrons of hedge funds along with other people’s money.

Back at the end of August, when there were $17 trillion of negative yielding bonds, they included about $1.2 trillion in corporate bonds. I’m not sure if that was the moment of peak absurdity – but it might have well been.

In Europe and in Japan, yields have snapped back too. The German 10-year yield snapped back 26 basis points, from a negative -0.7% at the end of August to a negative -0.44% on Friday. Maturities of 25 years or higher have positive yields once again. The 30-year yield closed on Friday at a positive 0.13%. Just a couple of weeks ago, the German government attempted to sell 30-year bonds with a negative yield, at an auction that “failed.” The Japanese 10-year yield snapped back 13 basis points from a negative -0.28% to a negative -0.15%. Maturities of 14 years or longer have positive yields.

That $17 trillion of bonds with negative yields at the end of August has by now shrunk to about $12 trillion. That’s still absurd, but it’s $5 trillion less absurd than it was two weeks ago.

In the US, if the 10-year yield follows prior snapbacks and heads up toward 2.7% over the next five months or so, it would accomplish all kinds of things, including it would fix the yield curve. As the 10-year yield rises a little above 2%, the yield curve would begin to un-invert. And as the 10-year yield rises further, the yield curve would steepen.

The yield curve has been the hottest topic since last year, when it threatened to invert before it inverted partially this year. In the past, it was when the yield curve un-inverts that problems arise because the bets have all been placed on one side of the boat, on it inverting more deeply. So, there will be bloodletting among highly leveraged bets.

Mortgage rates have already jumped over the past eight days, along with the 10-year yield, though they remain extraordinarily low. 30-year fixed rate mortgages for prime borrowers were still quoted on Friday in the 3.8% neighborhood, with FHA and VA loans lower than that.

Snapbacks in the bond market can get messy – not for the overall economy, but for some financial players with big, complex, highly leveraged bets whose risks no one really tried to understand.

The US economy can digest a 10-year yield in the 3%-plus range without much trouble. Sure, home prices in some markets would slither lower, but they shouldn’t have risen that far in the first place, and the decline would just correct for overexuberance. Lower prices would be a boon for homebuyers.

But for those gambling folks… If the 10-year yield goes back where it had been last November, it would be over double the yield of two weeks ago, and folks risking the farm with a bet that counted on a yield closer to zero, which they have been promoting loudly for months, might just lose the farm.

You can listen to and subscribe to my podcast on YouTube.

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  45 comments for “Unstoppable Negative Yields Suddenly Become Stoppable

  1. Dude
    Sep 20, 2019 at 7:55 am

    Great analysis as I was wondering how long the snap-back in 10 year treasury prices would last. This would mean that real yields will be increasing during the snap-back.

    Since gold rallied up on a collapse in real yields in the last few months( gold becomes more attractive when safe bets like bonds yield less when inflation is taken into consideration), I would guess that we should see a major collapse in gold prices in the coming weeks.

    • Sep 20, 2019 at 9:21 am

      Dude,

      At the current price, I’m not a huge fan of gold, it had a great run, but I don’t think the price of gold will see a “major collapse in the coming weeks” due to real yields rising. Gold is not linked to yields though they do move in parallel from time to time.

      That said, higher and positive real yields around the world would make dividend stocks less attractive.

      • joe saba
        Sep 20, 2019 at 9:47 am

        remember only reason to buy gold is to diversify away from fiat currency and protect assets
        when SHTF I plan on converting 100% of income not used to survive
        right now I’m searching for those experiencing LIQUIDITY crisis

      • Sep 20, 2019 at 7:38 pm

        I think gold will be interesting next year.

        1. We’ve seen enough of a run-up to get investors looking again.
        2. Central banks are still net buyers.
        3. Gold advanced a lot on dollar strength. If the US dollar weakens a bit it that should put a tailwind on the price.
        4. The US elections are coming, and I expect both Trump and the Democratic candidates to say a lot of things that get investors excited about gold.

        We’ll see signs of exuberance in the PM’s when we look for them. They’ll all go up, CNBC will talk about gold more often, etc. That’ll be a good time to exit.

    • Vespa P200E
      Sep 20, 2019 at 9:31 am

      Sensed there were some unsavory players cheerleading and pocketing quick and easy $$$ on treasury bond fund rallies and those who jumped in the big mo recently may incur some losses.

      I think gold is going nowhere soon with decent support at low $1,500. If anything some upside with so many potential black swans in the horizon. I think gold is no longer so tied to inflation and yield but potential safe haven and realizations of FIAT currency that can be digitally printed at whims of central banks.

      Piqued interest in PM from Dalio and Druckenmiller of the world tells you even the big boys sense some upside when confronted with uncertainties. Been active sovereign silver coin buyer as too many American Eagle fakes out there as next big move might be silver and those old-time stackers may finally get rewarded.

      • c1ue
        Sep 20, 2019 at 10:10 am

        Wake me up when Silver gets within $20 of its recent peak of $49

      • RD Blakeslee
        Sep 20, 2019 at 1:36 pm

        Junk silver is very hard to fake so not worth doing, dimes and quarters, especially

        • medial axis
          Sep 20, 2019 at 1:49 pm

          Just as well junk dollars are hard to fake then.

    • Sep 20, 2019 at 2:49 pm

      You forgot Trump’s trade talks or meeting with China in October. Gold will get a push upwards after Trump’s meeting. Interest rates will get a push downwards.

  2. 2banana
    Sep 20, 2019 at 8:01 am

    Just an observation:

    With the Saudi refinery attack:

    Oil shot up 10% overnight (has been drifting lower since)
    Treasuries barely moved (no flight to safety)
    Gold barely moved (no flight to safety)

    Conclusion: Not that big a deal.

  3. rhodium
    Sep 20, 2019 at 8:13 am

    I expected the snapback in yields and was watching for the reversal. Yields for now will not be going to zero. However it did appear that there was a massive net short positioning in treasuries going back over the last year, presumably spurred on by the idea that we were going to see yuge economic growth. That hasn’t materialized, and instead weakness has crept in causing people to buy treasuries for safety and also causing a short squeeze for the optimism crowd. There’s still a net short position though, now treasury yields are coming back up possibly due just to natural market reflexes, but I don’t think we’ve seen the end of this economic weakness and definitely not of rate lowering on the low end. The snapback will end soon and then I think long term treasuries will more likely continue their long term down trend towards zero as long as central banks continue the same strategies and labor markets continue to promote low inflation/stagflation.

    • Downhill from here
      Sep 20, 2019 at 11:39 am

      As the Wolf has pointed out, the goods-based economy and the sectors that ship goods around are all nosing down into a recession. The services based economy may think they are immune to this, but don’t be surprised if the people who are losing their jobs (or who are afraid of losing them) in the goods based sectors stop buying those services. When the paycheck is missing, or in doubt, then cutting back on ordering from Uber Eats and instead remembering how to cook at home is one of the first and easiest things to do. Meanwhile, Uber won’t be happy to see rising rates at the time their sales start to tip over and drop from the recession in the goods based world. When companies like Uber start to suffer and go under or seek to restructure, that will keep at least the lawyers and bankers sector of the services economy up ….. for awhile.

  4. nofreelunch
    Sep 20, 2019 at 8:25 am

    It cracks me up that the Repo market was publicly humiliating the Fed while the Fed was trying to look like they were in full control of things with the interest rate cut. Just like under the Clinton Fed, the bond market might have to show it will run things for a while, and the Fed will have to take a backseat on all durations.

  5. 2banana
    Sep 20, 2019 at 8:39 am

    A pretty good short video on the topic.

    “Negative yields are occurring with greater frequency in global bond markets. What generates negative yields and why do investors continue to buy these money-losing bonds?”

    https://www.wsj.com/video/how-negative-yields-work/B6F4029A-5E36-402F-A76C-EED505776982.html

    • Sep 20, 2019 at 9:07 am

      They have to buy something. The snapback in yields implies dis-investment, or selling, and how can you sell when money keeps pouring into this market on a tidal wave? The EU giveth and they taketh away. Here’s your money how about a nice negative yielding bond? The cottage industry in financial services at the moment is figuring out where the new money will go. The EM? Yemen, Iran? The possibilities are endless.

  6. David Hall
    Sep 20, 2019 at 9:21 am

    The US Treasury yield curve is steepening. The long end of the bond curve is affected by supply-demand factors.

    Who would want to hold low yield securities in a rising rate environment? All these repos seem to coincide with the falling values of bonds further out the curve. There has been a four day run on the Fed for repo funds.

  7. Vespa P200E
    Sep 20, 2019 at 9:21 am

    Another good analysis Wolf with good explanations on “These vicious snapbacks are not uncommon.” and astute observations “bet that counted on a yield closer to zero, which they have been promoting loudly for months, might just lose the farm” as sensed there were some unsavory players cheerleading and pocketing quick and easy $$$ on treasury bond funds recently.

  8. Petunia
    Sep 20, 2019 at 10:18 am

    Negative yields are stupid! I know they are using the greater fool theory to make money, but taken to a logical conclusion, negative rates can go to -100% and even lower. This means they can take your money and you still owe them more. Really?

    It’s just confiscation by another name.

    • Anon1970
      Sep 20, 2019 at 3:40 pm

      Individual bond managers would never do something this foolish with their own money, but when it comes to managing other people’s money, they just want to be at least average and keep their jobs.

  9. Dot Connector
    Sep 20, 2019 at 11:31 am

    Hmmm, of course, officially, this ‘viscious snapback’ has nothing at all to do with the Fed now pumping $75 billion a day into keeping the big Wall St banks ‘liquid’. Nothing to see here. Move along, move along.

    • Sep 20, 2019 at 12:35 pm

      Dot Connector,

      There is a misunderstanding. What the Fed is doing is NOT “pumping $75 billion a day” into the market. These are overnight repos that unwind the next day. So they’re not additive. It’s the same $75 billion that gets turned over and over again until the Fed stops. Until 2008, the Fed did this routinely (with smaller amounts) as part of its tools to control short-term interest rates. I’ll have a post about it shortly.

    • Wisdom Seeker
      Sep 20, 2019 at 3:21 pm

      Actually the Fed repo action came not from the snapback, but when bond market players moved to _stop_ the snapback.

      Just about every bond fund in the market dropped from their bubble highs straight down to their 50-day moving average from Sept 3-13… and stopped dropping 5 days ago – and that’s when the Repo window opened.

  10. Mong
    Sep 20, 2019 at 11:34 am

    Re: “And the negative-yield mongers that were out there for months, preaching their book and prophesying near-zero or negative yields even for the 10-year US Treasury

    Lots of mongering stories and comments here are focused on negative ZLB, ZIRP, NIRP — that comment makes it sound like it was a matter elsewhere … that’s ok, I was involved in mongering — and see rates remaining low for the next several decades. In the shorter term, rates will remain in the current lower area, as will inflation and GDP. A recession is still likely within 2 years IMHO.

  11. Clarabel Woody
    Sep 20, 2019 at 12:18 pm

    Look, this issue of low rates is now the foundation of our economy and will be a normal part of life from now until the cows come home — and the confusion and chaos related to market volatility will only grow more intense, until one day, there is a massive hit-the-wall moment, where liquidity evaporates for everyone. The only thing to fix this mess will be some act of God, where the plumbing at the Fed and Treasury are re-engineered and re-aligned with central banks around the world that do their own re-modeling … and that aint likely gonna happen.

    “This” is a global matter of money hoarding that isn’t easy fixed or undone in some policy framework or tweet. Going forward, band aid tinkering and adjustments of rates and QE experiments and technical adjustments can’t stop the music that’s playing, but “they” can continue to make matters worse.

    This old post helps explain part of the problem, I suggest reading it:

    Perhaps the St. Louis Fed should speak more with the San Francisco Fed. While the St. Louis Fed is clearly blaming the failure of the Fed policies to produce meaningful economic growth on private ‘hoarders’, the San Francisco Fed very correctly described here that it is the Fed’s own interest on reserves rate policy (IORR) implemented in 2008 that led to the ‘hoarding’ of money, not by private individuals, but by the Fed member banks themselves, at the Fed.

    “Once the Fed was authorized to pay interest on reserves, the relationship between the levels of required reserves and excess reserves changed dramatically. For example, required reserves averaged almost $100 billion during the first six months of 2012, while excess reserves averaged $1.5 trillion!… the Fed can change the rate for interest on reserves to adjust the incentives for depository institutions to hold reserves to a level that is appropriate for monetary policy”

    https://thesoundingline.com/the-velocity-of-money-a-cautionary-tale/

  12. LouisDeLaSmart
    Sep 20, 2019 at 12:42 pm

    \\\
    It is interesting to see how we slowly transition from sanity to madness in a step-by-step fashion, slowly accepting our own madness as the new norm for sanity. I mean everyone is manipulating the market, buying stocks, securities, treasuries and averting the inevitable outcome of unknown proportions. All the while the norms and signs we used to indicate change ,for better or for worse, have become null and void. The anomaly: We just give the new anomaly a name, and suddenly we feel more in control and safer. And it, the once feared anomaly, becomes an accepted fact and the new norm of economic sanity.
    Examples:
    Quantitative easing -> Faking the market on a grand scale.
    Negative yield -> Dumping money into a losing game
    Negative interest rate -> free money for investors

    \\\
    Wolf, I propose a contest! Let’s sum up all the newly phrased economic terms of the last 40 years and give everyone a chance to submit an explanation (something like Websters dictionary) but with intended pun and sarcasm. As a prise the winner gets to go to a shop and buy her/him-self a T-shirt from their own money! Because if we are going to go down, let’s do it with a smile!
    \\\

    • Sep 20, 2019 at 7:27 pm

      Maybe WOLF STREET should reward the winners with a T-shirt that says, “Make Yields Great Again.” No?

      • LouisDeLaSmart
        Sep 20, 2019 at 11:38 pm

        \\\
        Looks like you already started…MYGA shirt and hat for the winner!
        \\\

      • Sep 21, 2019 at 6:42 pm

        You say the word Wolf, and I’ll make them happen.

        • Sep 21, 2019 at 9:47 pm

          OK, here we go. The pro is speaking :-]

          We might have a conversation about that after the WOLF STREET beer mugs have sold out. Can’t wait to get the first mug. Do you have an ETA?

      • Wes
        Sep 22, 2019 at 7:49 am

        Sounds like a winner for fixed income.

  13. Bologna
    Sep 20, 2019 at 1:17 pm

    We should just admit that 50 years of selling treasuries to our enemies
    Might just make us a little vulnerable

    • EchoDelta
      Sep 20, 2019 at 1:52 pm

      How?

      Sell an asset that you can manipulate the value of at will or whimsy to people you might need to leverage? Think about it for a second away from the internet.

    • Sep 20, 2019 at 2:34 pm

      Worse than allowing our friends with less stable economies to issue debt using our dollars?

  14. Just Some Random Guy
    Sep 20, 2019 at 1:46 pm

    So the world is NOT about to end as we know it after all? Phew.

  15. sunny129
    Sep 20, 2019 at 2:00 pm

    To Wolfe

    Was the SNAP BACK of 43 basis in the yield of 10 y, has any thing to do with ‘quantum quake’ in the sudden reversal (ALGOes) from growth/momentum to beaten down Value sector? Thanks

  16. Memento mori
    Sep 20, 2019 at 2:20 pm

    Come on Wolf, that was a classic short squeeze, interest rates on the 10 year are going to zero. Nothing goes down or up in a straight line. Dow will hit 30k within a year.

    • sunny129
      Sep 20, 2019 at 3:23 pm

      It may or may not go to zero but if there is repeat of these SNAP BACK events infrequently or back to back, it may decimate the bond holders, along the way, across the spectrum.

    • Rowen
      Sep 20, 2019 at 5:48 pm

      Wait, a short squeeze in bonds should reduce yields, as traders are forced to buy bonds to cover their shorts?

      This was all about the quant quake, money moving out of momo assets that had been really bid into value and most-shorted assets. Algos don’t give a shit about fundamentals.

  17. David Hall
    Sep 20, 2019 at 2:42 pm

    The 30 year T-bond hit a bottom on 8-28 and has been rising since. The Fed funds target range was lowered, thus a steeper long end of the curve.

  18. porque
    Sep 20, 2019 at 2:49 pm

    I have a question about the last fed meeting, somewhat relating to interest rates, etc. The Chairman mentioned that the consumer was essentially looking great.

    Why aren’t the exorbitant costs of housing on the feds radar as potentially risking/impacting consumer in the near future? For those Americans who chose to or have to rent, it is trying on them.

    Thank you

    • Sep 20, 2019 at 7:03 pm

      porque,

      Powell actually sort of corrected himself to clarify that the consumer overall as one unit is doing pretty well — but not everyone is doing well. There are a lot of consumers who’re doing great. And there are a lot of consumers on the other end of the spectrum who are struggling.

  19. Wisdom Seeker
    Sep 20, 2019 at 3:42 pm

    One big question is whether the bond bubble has more rally left, or if rates have finally hit bottom in their ~60-year cycle.

    Look at 20-year chart of the 10-year Treasury yield. Major low in mid-2012 (1.39%) was undercut in mid-2016 (1.33%). But if this month’s low (1.43%) isn’t broken, that reverses the pattern of lower-lows.

    Meanwhile, since 2012 the major highs were 3.03% (2014) and 3.25% (2018). Higher highs.

    When a chart shows higher-lows and higher-highs, market participants tend to see a rising pattern. That would be a major long-term trend change. The last major interest-rate bottom was in the 1950s.

    As Wolf noted, there’s a geopolitical dimension to rates. Stronger US rates imply either stronger global rates (Europe, Japan, China) or a stronger dollar. It will be interesting to see if Europe and Asia find a way to get aboard the higher-rates train this time, if they derail into a financial crisis as bad debts finally get recognized… or both… or neither.

  20. Augusto
    Sep 21, 2019 at 8:41 am

    At some point people are going to figure out that not all this debt is going to be repaid. When creditors come to the realization it might be them without a chair when the music stops, watch out. I think gold and silver are hedges, but they can confiscate as the have done in the past (kick that chair away). Of course they are fleecing you (savers, pension funds) slowly via low or negative interest rates, (taking bits off the chair legs and cushion stuffing). So an investor is a bit like a pedestrian lost and dodging cars on the freeway looking for safety. So we will all have to keep dancing, one way or the other.

Comments are closed.