Morning Bond Charts

The flip flop between equity and credit accelerates. Just as the administration managed to lower mortgage rates enough to get a moderate pick up in refi applications, bonds are starting to get out of control. The equity-bond flip flop is sure to inspire motion sickness for weeks and month as the powers that be attempt to valiantly balance out marginal confidence boosting improvements in 401(k) statements with nominal refinance applications in California foreclosure properties (all the while pretending that spiking commodity prices won't destroy company margins, and that the dollar's programmed crash will permit Europe to export even one BMW to its favorite all-consuming ally accross the Atlantic).

The 10 Year adjusted for inflation swap breakeven:

But we have space for more...With a conveniently higher market baseline from which to drop next time a correction is needed.

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Bond Action Back In The Spotlight

10 Year on fire since yesterday, now over 20 bps wider.



2s10s also starting to look like a ski jump ramp straight out of Innsbruck.

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Intraday Credit Observations

People using "negative" proceeds from buying stuff to buy other stuff... Yes, one of those rare days where the money just comes out of nowhere and buys stocks, commodities, f/x and bonds all up at the same time.

So here are the results of magical money growing on trees:

10 Year UST:



30 Yr FNMA coupon (mortgages):



Major curve flattening:

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Mortgage Vigilantes Beating Death Drums

Even though the market's brief hiccup into green territory was promptly corrected (as expected earlier), it is the mortgage vigilantes' turn to beat the death drum. The 30 Yr Mortgage - 10 Yr UST spread is not helping the new, existing, and otherwise home sale green shoots. And this on top of the Treasury's $7 billion in Open Market purchases of bonds yesterday.

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We Have Mortgage Lift Off

The spread between mortgages and the 10 year just exploded...



But not because anyone is buying the 10 year.

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Intraday Credit/Mortgage Weakness

Equity markets may need to be reigned in a little - after the recent drop in mortgage rates and a steepening of the bond curve (thanks to a not insubstantial drop in equities), the S&P target makers may need to adjust the target for equities again. With the S&P running higher for the day, both the 2s10s is steepening and mortgages are starting to run wider. Time to take the market lower to see at what level we get a new equilibrium. Of course the best outcome, would be to find at what price level the S&P can be gently nudged higher without corresponding leakage in mortgages and bonds.



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Just A Tad Choppy

We hope mortgage traders brought their dramamine today. All is smooth and gentle in the 10 yr UST - 30 Yr Mortgage spread market.

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Time For QE2?

The bond market has spoken, and it demands QE2 (the equity market is insane - it has no idea what it wants). The way treasuries and mortgages are trading, the situation threatens to very quickly spiral out of Bernanke's control (and then how will Wells and BofA pretend like they have some recurring cash generating power? On the non-recurring front, AIG has already been tapped dry.) The table below indicates that based on 2009 supply (not to mention outstanding notionals) the Fed will have to reach into its toolkit for some other (very drastic) measures.



It is painfully obvious that the status quo will not suffice. So the real question is what is the Fed waiting for?Is Ben merely afraid of China's reaction to the imminent launch of QE 2-xxx - that would seem like an irrelevant issue as marginal refi/lenders are about to be priced right out of the market, at the same time as house prices are still dropping, thus destroying absolutely any incentives for (highly confident) consumers to lever themselves up.

Of course, the traditional repricing of govvies would involve a dropping stock market (and actual, non-transferable corporate risk), however with all the garbage propaganda about green shoots and all that other crap, combined with government backstop programs of every kind and with a disappearing market liquidity, Bernanke et al have made it impossible to price equities properly: one mere needs to observe the lack of sellers after any plateau.

As for the dollar, while it has gotten phenomenally cheap recently, it is only a matter of time before the Eurozone caught up, as it starts to feel the true impact of the trillions of toxic assets, which are allegedly marked at even more ludicrous levels than their U.S. counterparts. Of course, there is the South Korean Won safe haven...

So while Bernanke contemplates the Catch 22 of his most recent Frankenstein, I present the chart of the 30 Year (not the 10 Year I have been focusing on). Although, one would not know that by looking at it.

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As Ben Is Playing Mortgage Chicken, The 10 Year Is In The Woodshed

First Treasuries have gotten walloped, to far beyond pre QE levels (the 10 UST is getting monkeyhammered as I type, see below), next the 2s10s curve has steepened to almost record levels (at 271 bps recently, record wide at 273 bps, a mere 2 bps away), and now the pain is slowly shifting into mortgages. Despite the successful sale of $35 billion of 5 year notes at 2.31% on demand mostly by foreign central banks (who presumably aren't too excited about seeing the Fed overtake them as the biggest US global) credit , the farther end of the curve keeps bleeding on questionable demand, and the 10 Year UST vs the FNMA 30 Year Current Coupon has gotten so uncomfortably tight, that in the ongoing game of bond chicken played between Bernanke and the market the first to blink could well suffer irreparable harm.







Naturally, if it is in fact Bernanke who blinks first, the consequences for mortgage rates could be so dire, even Bloomberg has finally picked up on the issue.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds climbed to 4.3 percent as of 10:25 a.m. in New York, the highest since March 10 and up from 3.94 percent on May 20, data compiled by Bloomberg show.

All that talk of cheap refinancings is now officially out of the window, and all the recent mortgage refi activity which has been the primary reason for banks benefitting from the abovementioned 2s10s curve will cease shortly, absent another major overhaul of Quantitative Easing. So the market is basically saying that it will now only believe the inflation rhetoric if the Fed is willing to throw another $1 trillion in UST/MBS purchases. As Zero Hedge discussed, the Fed's balance sheet is already at a pro forma level of about $3.2 trillion: what happens if its hits the $4 trillion+ stratosphere is anyone's question. In the meantime, stocks continue trading on no volume, hugging the flatline as if everything is hunky dory, totally oblivious to the Nightmare on Elm Street mauling that is going on in the mid/far end of the curve. In fact every micro uptick in the S&P500 (likely the result of a latency burst catching up with the SLPs over in the NYSE) causes another major selloff in 10 Years.

Chart hat tip The Irish Menace, Credit Trader.
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10 Year Hits 3.50%

The selloff in bonds is unstoppable. Bernanke is furiously scratching his head at this point, as he envisions the future: S&P at 2,000, and a 30 year mortgage at 20%. Brilliant

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What Quantitative Easing?

10 Year Treasuries trading as if the whole QE thing never happened. Courtesy of visible and invisible hands which have made holders dump their bonds and chase after an insane market.

Totally unconflicted commentary from Paul McCulley of Pimco "The data is indicating we are in the bottoming process. The rate of decline is slowing." Took the words right out of Grasso's mouth.

Time for QE 2.0? Why not - the Treasury and the Fed are not know for getting things right the first time around... or fifth...

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