Will PIMCO Need a Bailout Soon?

Treasury selloff continues. As equities are poised to hit ridiculously high fwd P/E ratios, someone is making sure that Bernanke and Bill Gross hit the Prozac handout line. Hold on, wasn't the Fed buying treasuries? What about the world's biggest bond fund? Based on this chart, seems like sellers are outnumbering buyers by just a tad...

At this rate, I can't wait to see 30 year mortgages below comparable treasuries in a about a week.



Seems Bill is expecting a cap on Treasury rates. "I think at some point we're going to see a 4.5 percent mortgage rate and the 10-year Treasury rate capped at some level," he said. "When the Fed comes in to buy Treasurys that will be a big day." No doubt Bill, no doubt. It will be an even bigger day when everyone comes in to sell.

In tangential news, some thoughts on Treasury yield curves from Miller Tabac's very own Tony Crescenzi:

Yield Curve Steeper

The Treasury yield curve continues to steepen and is now at its steepest in about three months. The steepening has both good and bad connotations to it. The most important positive is the message that a yield curve typically sends. The current yield spread between 3-month T-bills and 10-year T-notes--the key empirical gauge is 276 basis points, a level that historically has indicated the chances of recession 12 months hence are very small. In a study by Estrella and Mishkin, a yield spread of more than 121 basis points was associated with just a 5% chance of recession, which makes the current level comforting. For reference, note that the same study showed that a yield spread of -82 basis points (an inverted yield curve), produced 50% odds of a recession. The yield spread was as wide as -60 basis points in February 2007.

Some of the recent steepening of the yield curve reflects the increase in Treasury supply, with the long-end of the yield curve bearing the burden, the negative angle on the steepening. If the U.S. dollar were to fall, the steepening would take on an event larger negative angle, but any weakening would have to be significant to have meaningful impact on the yield curve on the whole. In other words, if the dollar is sharply weaker and the yield curve is sharply steeper, it would probably indicate a loss of appetite for U.S. assets and raise the cost of capital in the U.S., complicating efforts to battle the financial and economic crisis.

Sphere: Related Content

Bookmark this post with:

• 
• 
• 
• 
• 
• 
• 
• 
• 

Print this post