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OpEdNews Op Eds    H4'ed 9/4/10

The Yield Curve Twists Again

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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
Recent Minimum Yield Curve and the Normal Yield Curve
(Image by Shalom Hamou)
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We had a splendid Hammer on August 25th on 10 Years US Treasury Notes:

Runaway Gaps:

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

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:

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:

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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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