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The Yield Curve Twists Again

By   Follow Me on Twitter     Message Shalom Patrick Hamou     Permalink

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As I explained in my article "The Yield Curve Twist Omen" long-term yields have been undervalued for an extended period of time. Although that undervaluation can last an extended period of time once the arbitrage has started it can reach its fair value very quickly. This article is meant to bring further evidences of the fact that this Twist is in the making, which I have called since August 24th "The Nemesis of Long-Term Yields"

I explained in these articles that a twist of the yield curve from a grossly undervalued configuration to a fair valuation was in the way:

The orange yield curve is the recent lowest yield curve (on August, 25th).The green yield curve is the expected, almost normal, yield curve (on Sept 17th).


Recent Minimum Yield Curve and the Normal Yield Curve
(Image by Shalom Hamou)
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Hammer:

We had a splendid Hammer on August 25th on 10 Years US Treasury Notes:


Daily Chart of the Future on 10 Years US Treasury Notes
(Image by Shalom Hamou)
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Runaway Gaps:

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On Friday we made a fantastic Runaway Gap from Thursday between 2.639% and 2.650%.


Hourly Chart of the Yield of the 10 Years US Treasury Notes
(Image by Shalom Hamou)
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Other Supporting Evidences:

I remind you that this Twist of the yield curve does not come from any macro economic reason but only as a dynamic return of the yield curve from a formidably undervalued configuration to its fairly valued configuration.

Prove is that in getting that reversal we didn't get extraordinarily good macro economic figures: they were just as bad as usual. The reaction to Jackson Hole meeting which in other times would have crushed down long-term yields had just the opposite effect.

Economic Expectations:

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The Federal Reserve System will necessarily misinterpret that steepening of the yield curve:

The Yield Curve as a Leading Indicator

Forecasting Recessions: the Puzzle of the Enduring Power of the Yield Curve





Market Movements:

Fixed Rates:

Expect the upward trend of the yields long-term treasuries to continue and accelerate. For the Yields on 10 Years US Treasury Notes the objective is 3.500% [ 121 on December Futures on 10 Years US treasury Notes] on September 17th which means that we have already made 30 BIPs and we have still 75 to make in 8-9 days that makes an average increase of 9 BIPs.

As chasing rates will be less a necessity the spreads between corporate and government bonds (in perticular junk) will widen. Junk bonds, of course, will collapse with the crash.

TED Spread:

As chasing for rates will be less necessary the TED spread will continue to widen as it has done since August 25th. It will explode on the crash.

Stock Market:

As market participants will misinterpret the steepening of the yield curve stock indices will continue to go up till Sept. 7th.

Minerals:

Mineral prices will continue to crawl up till the yield curve gets normal, they will then sharply go down to their marginal cost of extraction (Commodity Conundrum Solved: The Hidden Parameter in Interest Rates).



Facebook:

Events:

The Market Crash: Be Prepared.

Post Crash Economy - Economic Non Compliance Week.

Page:

The Post Crash Economy

Groups:

Prepare for Market Crash Before September 9th.

The Religious Interpretation of Employment, Interest, and Money.

Libertarians Against Credit.

Muslims Against Credit With Interest.

 

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I have an engineer diploma from Ecole Centrale de Lyon (France) and a MBA from Boston University. Since 1986 till 1994 I have worked as a broker dealer on the French Domestic Fixed interest market. Since the spring of 1994 I have worked on the (more...)
 

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