I entered a paired trade in February where I went long short-term corporate bonds and shorted long-term government bonds. This has been doing pretty well so far. Over the past two days however, Treasuries have spiked. Ouch! Check out this interesting article about treasury prices in the latest issue of Barrons.
Treasury Yields Leap to Fair Value
By RANDALL W. FORSYTH
THIS HAS BEEN THE WORST TREASURY bond market ever, at least by some measures. Yet, the reasons aren't what you hear from the Howard Beale-style rants from Chicago futures pits.
While there are legitimate reasons for concern about the Treasury's trillion-dollar borrowing needs, the reluctance of creditor nations to accommodate them and the Federal Reserve's money printing, the recent back-up in yields largely reflects other, less fundamental reasons.
From a hair over 2% at the beginning of the year, the benchmark 10-year Treasury yield surged to a high of 3.70% Wednesday. And the 30-year long bond vaulted more than two full percentage points from their December lows to 4.63% Wednesday.
That doesn't sound like much except to bond geeks, but in price terms, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) lost 25% of its value over that time. That was nearly as big as the plunge in Dow Jones Industrial Average from the turn of the year to its early March lows.
What's extraordinary is that this jump in long-term bond yields came as the Fed pinned its federal-funds rate target at close to zero. Other back-ups in bond yields came when the market anticipated future hikes in the overnight rate, but the Fed has made it clear it will hold its funds rate target at virtually nil for as long as it takes to jump-start the economy.
Moreover, on March 18, the central bank said it would buy an additional $1 trillion of U.S. agency debt, agency mortgage-backed securities and Treasuries to push longer-term rates down to lower borrowing costs, in particular on mortgages.
That clearly hasn't happened; just the opposite. The Treasury yield curve (typically described as the difference between the two- and 10-year note) steepened to a record 2.77 percentage points Wednesday, according to Stone & McCarthy Research Associates.
Part of the back-up reflects the low absolute level of rates earlier this year. Indeed, 10-year Treasury notes yielding only 2% -- as they were around the turn of the year—were attractive only relative to other assets that were collapsing under fear of an economic apocalypse.
With disaster averted and the sighting of the so-called green shoots of growth, stocks had a bungee-jump rebound from their previous nosedive. And low-yielding Treasury notes, which were clutched as life preservers in the storm, were cast off.
But, contends Lacy Hunt, chief economist of Hoisington Investment Management, an Austin, Texas, manager of $4 billion in assets, "The sharp rise in Treasury yields is not a result of an economic recovery. That occurs when income, production, employment and sales, simultaneously, turn higher. Presently, these indicators merely show a lessened rate of decline."
Nor can the burgeoning Treasury borrowing needs fully account for the rise in yield. The ratio of government debt to gross domestic product showed massive increases in the U.S. during the 1930s and 1940s and in Japan since the 1990s, yet yields continued to decline. Indeed, Hunt argues, the shift in productive resources to the government sector from the private sector doesn't stimulate but stymies economic growth.
Finally, the Fed's expansion of its balance sheet doesn't translate into monetary stimulus if the liquidity merely increases excess reserves in the banking system or increases sterile holdings of money balances. Bank credit continues to contract sharply, Hunt points out.
So, what's to account for the sharp rise in Treasury bond yields? Blame it on the intricacies of the mortgage market.
There's a reason that Wall Street hired "rocket scientists" with math PhDs to analyze mortgages. The ability of homeowners to pay off home loans with little or no penalty makes them devilishly difficult to figure out, unlike bonds that commit the borrower to a fixed repayment schedule. Obviously, homeowners will repay or refinance when it's most advantageous for them, which is the worst time for investors in mortgages.
To offset this problem, they hedge with noncallable Treasuries -- buying when they brace for a wave of refinancings and selling when rates rise. Refinancings leave investors with short-term securities when rates fall—exactly what they don't want. Conversely, rising rates encourage homeowners to hang onto their low-cost loans, resulting in the lengthening of the maturity for investors -- again, the last thing they want..
While mortgage investors previously had bought non-callable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries.
This sounds like so much inside baseball but it amounts to huge sums. According to an estimate by mortgage-securities-market veteran Alan Boyce, writing for Drobny Global Advisors, these hedge sales are equivalent to issuance of $1.1 trillion (with a "T") of 10-year Treasury notes, compared to expected sales of $250 billion of that maturity this year.
Clearly, Treasuries were in a bubble when they yielded just 2% for 10 years. Technical factors have nearly doubled that yield from the lows, but not fundamentals -- which still reflect a recessionary economy and debt deflation. As a result, Treasuries are back to fair value for these conditions.
Must Read: You Should Be Petrified
Great video from Howard Davidowitz. He doesn't hold back any punches. If you can't check out the video, which I highly recommend, then here's a brief summary:
The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.
The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.
"We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool."
Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same."
This outlook is based on the following main points:
- With the unemployment rate rising into double digits - and that's not counting the millions of "underemployed" Americans - consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.
- Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.
- More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a "depression" in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.
As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory."
"We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."
The Story of TARP Wife
In sharp contrast to the post of on Toxic Wives, is a story about a TARP wife.
Confessions of a TARP Wife
Forget the opera. Cancel dinner at Bouley. How life has changed since my CEO husband went on the government dole.
I am a TARP wife.
In keeping with the unwritten code of this new sisterhood, I have taken a vow of financial abstinence. I returned the presents my husband gave me for Christmas (but didn't tell him, since he's already awash in gloom) and am using my credit balances at all the major department stores for important gifts and other necessities.
I haven't even looked at spring clothes; God forbid someone catches me out in something new. Keeping up with fashion seems somehow decadent in this new era, like getting Botox injections or catered dinners. Like so many others, I'm shopping in my closet. I've bought exactly two things this year -- makeup and panty hose. If I buy a present for someone, I have the package sent to their home. I don't want to be spotted climbing into a taxi, laden with Bergdorf Goodman shopping bags.
As you can see, being a TARP wife means, in short, making decisions according to a complex algorithm: balancing the need to look like your world hasn't crumbled beneath you -- let's not alarm the investors! -- with the need to appear duly repentant for your subprime sins. It also means we're part of the community of more than 400 companies that have received government bailout funds, whose fall from grace has been swifter and harsher than any since Mao frog-marched intellectuals into China's countryside.
Hitting the perfect note isn't always easy. For instance, for the past 15 years or so, I have thrown my husband a birthday party. We traditionally celebrate with about 30 friends, mostly New York pals we've known for decades. We're not talking an end-of-an-era Stephen Schwarzman-type $10 million blowout. Ours is a pretty sedate affair.
This year, of course, entertaining our crowd at our usual multi-star Michelin hotspots would simply not do. Extravagant is out; conservative is in. But not hosting a birthday dinner would have spurred rumors that we were broke, not a welcome thought either. Juggling these conflicting impulses, I decided on a slimmed-down party. Choosing Versailles to host World War I peace negotiations could not have been more complicated than my attempt to select the perfect spot for our annual dinner. Naturally, every restaurant I contacted was willing to meet my reduced budget; now that Wall Street firms are no longer entertaining clients or hosting events, New York eateries are struggling.
At the end of the day, it came down to a choice between an especially accommodating (and well-known) high-end restaurant and a less expensive, clubbier spot. We ultimately picked the cozier restaurant -- even though it ended up costing us more, so eager was the more chic outfit to host the party. Why spend the extra bucks? Because our chosen place is distinctly low-profile and rarely mentioned in the press. We did not need a snarky story about a "Wall Street bigwig living it up while taxpayers wonder where their money went." Really, not even President Obama spends this much time looking after his image.
It wasn't long ago that America celebrated successful companies and the people who run them. My husband, CEO of one of the biggest TARP recipients, has received more than his share of accolades (in my opinion, well deserved). But because of a few tin-eared nitwits who failed to notice that their industry was under siege, the entire country now thinks that TARP bankers are greedy incompetents dedicated to ripping off taxpayers. Fancy wastebaskets, under-the-rug bonuses, lavish junkets -- these are Exhibits A, B, and C in the people's case against Wall Street. Even the Octomom gets better press.
Here is the reality: TARP managers are scared to death. The executives of these companies are desperately trying to hold their businesses together while complying with a slew of damaging bills flooding out of Congress. My husband has battled the shutdown of the credit markets and a deteriorating business environment for two endless years without respite. He's exhausted, terrified of losing the company, and beaten down by the constant criticism hurled at him.
I'm trying to buck him up and not complicate his life. The last thing he needs is unpleasant publicity, so I'm learning to fly so far below the radar that I have perpetually skinned knees. We've picked up new habits, like making donations anonymously and sneaking in late to black-tie galas after society photographer Patrick McMullan has packed up his camera and gone home. We now regularly turn down the invitations we receive from museums and arts organizations that will inevitably be followed by a request for funds. No point in getting their hopes up.
I get it that I may not win much sympathy. Why should I? I'm not pleading poverty. We still live in relative luxury, we can afford almost everything we need, and we aren't facing the prospect of losing our home or having to turn to our families to support us. But we are getting squeezed.
Like most Americans, we are worried about money. Our net worth is tied up in stock that is down 95 percent. Last year, before it became fashionable to do so, my husband refused a bonus. Because of the new restrictions, his pay this year will be a fraction of what it was. The combined swoon in our income has caused us to cut spending drastically, in hopes that we can hang on to some remnant of our former lifestyle.
In an effort to conserve cash, we are eating out less frequently, meaning that I've been turning out some pretty dreadful lasagna. Actually, staying home and watching Law & Order reruns has become our new guilty pleasure. It's a far cry from opening night at the Metropolitan Opera, but it's not bad. I drive the family crazy by switching off the lights every time we leave a room. Needless to say, we fly commercial. Using the company plane is now out of bounds; we've heard there are reporters staking out the private airports.
I have become oddly superstitious. On some level, I feel I'm being punished for too many thoughtless years of assuming that the trappings of success were earned and not given. I'm constantly knocking on wood or offering little good-citizen sacrifices, like manically recycling or chatting with telemarketers.
I'm struggling with how to communicate all this to our children. We're thankful that they're intent on making their own way in the world, but at the same time, they confidently rely on us for help. One daughter recently mused about going back to business school. I hope she didn't notice my instantly negative reaction, stemming completely from concern about the cost. I cannot bring myself to shake her foundation. The collapse of the world economy has already crushed the confidence of young people just starting out. Meanwhile, retirement is like a rainbow, a beautiful mirage that we'll probably never reach. To some people, these may seem like luxury problems, but to us they are painful.
I've watched the skin under my husband's eyes take on a yellowish hue, and his hair turn from gray to grayer, as he tries to lead his company through this mess. He's up every night for hours at a stretch, and for the first time, he has health issues. For a person whose life has been punctuated mainly by success -- from perennial class president and high-school sports star to Ivy League MBA -- failure is the worst of all nightmares. He seems off balance, as though self-confidence were a physical ballast that he is slowly losing. It's heartbreaking how often he apologizes to me for losing so much of our money, for making so many mistakes.
I know people are angry at those they view as responsible for the subprime crisis and the subsequent economic meltdown. I don't blame them. I'm angry too. But my fury extends to any number of culprits: to Alan Greenspan, who encouraged the loose-money policies that undermined the pricing of risk; to Barney Frank, who cudgeled Fannie Mae into supporting loans to unfit homebuyers; to the rating agencies that were ethically compromised; to the subprime-mortgage brokers who chased fees and ignored any accountability; to the investors who didn't do their homework and absurdly leveraged up their balance sheets. I'm an equal-opportunity blamer.
And yes, I blame those who were in charge of the big banks -- including my husband -- for not seeing the default tsunami coming. But almost no one did. Everyone knows this, yet financial CEOs have replaced the Mob as the most despised group in the country.
The good news is that Americans have short attention spans. Before long, some other group will come along to absorb all the frustration and anger.
Meanwhile, I'm off to the tailors to get some clothes altered. Shopping your closet is great unless you've put on a few pounds over the years. I've been holding out hope that fewer nights out could shrink me to fit back into some of the past warhorses of my wardrobe. Unfortunately, our appetite for comfort food has risen in proportion to the Dow's decline; the selloff this past month has upped our mac-and-cheese intake and created a sinecure for my seamstress.
Confessions of a TARP Wife
Forget the opera. Cancel dinner at Bouley. How life has changed since my CEO husband went on the government dole.
I am a TARP wife.
In keeping with the unwritten code of this new sisterhood, I have taken a vow of financial abstinence. I returned the presents my husband gave me for Christmas (but didn't tell him, since he's already awash in gloom) and am using my credit balances at all the major department stores for important gifts and other necessities.
I haven't even looked at spring clothes; God forbid someone catches me out in something new. Keeping up with fashion seems somehow decadent in this new era, like getting Botox injections or catered dinners. Like so many others, I'm shopping in my closet. I've bought exactly two things this year -- makeup and panty hose. If I buy a present for someone, I have the package sent to their home. I don't want to be spotted climbing into a taxi, laden with Bergdorf Goodman shopping bags.
As you can see, being a TARP wife means, in short, making decisions according to a complex algorithm: balancing the need to look like your world hasn't crumbled beneath you -- let's not alarm the investors! -- with the need to appear duly repentant for your subprime sins. It also means we're part of the community of more than 400 companies that have received government bailout funds, whose fall from grace has been swifter and harsher than any since Mao frog-marched intellectuals into China's countryside.
Hitting the perfect note isn't always easy. For instance, for the past 15 years or so, I have thrown my husband a birthday party. We traditionally celebrate with about 30 friends, mostly New York pals we've known for decades. We're not talking an end-of-an-era Stephen Schwarzman-type $10 million blowout. Ours is a pretty sedate affair.
This year, of course, entertaining our crowd at our usual multi-star Michelin hotspots would simply not do. Extravagant is out; conservative is in. But not hosting a birthday dinner would have spurred rumors that we were broke, not a welcome thought either. Juggling these conflicting impulses, I decided on a slimmed-down party. Choosing Versailles to host World War I peace negotiations could not have been more complicated than my attempt to select the perfect spot for our annual dinner. Naturally, every restaurant I contacted was willing to meet my reduced budget; now that Wall Street firms are no longer entertaining clients or hosting events, New York eateries are struggling.
At the end of the day, it came down to a choice between an especially accommodating (and well-known) high-end restaurant and a less expensive, clubbier spot. We ultimately picked the cozier restaurant -- even though it ended up costing us more, so eager was the more chic outfit to host the party. Why spend the extra bucks? Because our chosen place is distinctly low-profile and rarely mentioned in the press. We did not need a snarky story about a "Wall Street bigwig living it up while taxpayers wonder where their money went." Really, not even President Obama spends this much time looking after his image.
It wasn't long ago that America celebrated successful companies and the people who run them. My husband, CEO of one of the biggest TARP recipients, has received more than his share of accolades (in my opinion, well deserved). But because of a few tin-eared nitwits who failed to notice that their industry was under siege, the entire country now thinks that TARP bankers are greedy incompetents dedicated to ripping off taxpayers. Fancy wastebaskets, under-the-rug bonuses, lavish junkets -- these are Exhibits A, B, and C in the people's case against Wall Street. Even the Octomom gets better press.
Here is the reality: TARP managers are scared to death. The executives of these companies are desperately trying to hold their businesses together while complying with a slew of damaging bills flooding out of Congress. My husband has battled the shutdown of the credit markets and a deteriorating business environment for two endless years without respite. He's exhausted, terrified of losing the company, and beaten down by the constant criticism hurled at him.
I'm trying to buck him up and not complicate his life. The last thing he needs is unpleasant publicity, so I'm learning to fly so far below the radar that I have perpetually skinned knees. We've picked up new habits, like making donations anonymously and sneaking in late to black-tie galas after society photographer Patrick McMullan has packed up his camera and gone home. We now regularly turn down the invitations we receive from museums and arts organizations that will inevitably be followed by a request for funds. No point in getting their hopes up.
I get it that I may not win much sympathy. Why should I? I'm not pleading poverty. We still live in relative luxury, we can afford almost everything we need, and we aren't facing the prospect of losing our home or having to turn to our families to support us. But we are getting squeezed.
Like most Americans, we are worried about money. Our net worth is tied up in stock that is down 95 percent. Last year, before it became fashionable to do so, my husband refused a bonus. Because of the new restrictions, his pay this year will be a fraction of what it was. The combined swoon in our income has caused us to cut spending drastically, in hopes that we can hang on to some remnant of our former lifestyle.
In an effort to conserve cash, we are eating out less frequently, meaning that I've been turning out some pretty dreadful lasagna. Actually, staying home and watching Law & Order reruns has become our new guilty pleasure. It's a far cry from opening night at the Metropolitan Opera, but it's not bad. I drive the family crazy by switching off the lights every time we leave a room. Needless to say, we fly commercial. Using the company plane is now out of bounds; we've heard there are reporters staking out the private airports.
I have become oddly superstitious. On some level, I feel I'm being punished for too many thoughtless years of assuming that the trappings of success were earned and not given. I'm constantly knocking on wood or offering little good-citizen sacrifices, like manically recycling or chatting with telemarketers.
I'm struggling with how to communicate all this to our children. We're thankful that they're intent on making their own way in the world, but at the same time, they confidently rely on us for help. One daughter recently mused about going back to business school. I hope she didn't notice my instantly negative reaction, stemming completely from concern about the cost. I cannot bring myself to shake her foundation. The collapse of the world economy has already crushed the confidence of young people just starting out. Meanwhile, retirement is like a rainbow, a beautiful mirage that we'll probably never reach. To some people, these may seem like luxury problems, but to us they are painful.
I've watched the skin under my husband's eyes take on a yellowish hue, and his hair turn from gray to grayer, as he tries to lead his company through this mess. He's up every night for hours at a stretch, and for the first time, he has health issues. For a person whose life has been punctuated mainly by success -- from perennial class president and high-school sports star to Ivy League MBA -- failure is the worst of all nightmares. He seems off balance, as though self-confidence were a physical ballast that he is slowly losing. It's heartbreaking how often he apologizes to me for losing so much of our money, for making so many mistakes.
I know people are angry at those they view as responsible for the subprime crisis and the subsequent economic meltdown. I don't blame them. I'm angry too. But my fury extends to any number of culprits: to Alan Greenspan, who encouraged the loose-money policies that undermined the pricing of risk; to Barney Frank, who cudgeled Fannie Mae into supporting loans to unfit homebuyers; to the rating agencies that were ethically compromised; to the subprime-mortgage brokers who chased fees and ignored any accountability; to the investors who didn't do their homework and absurdly leveraged up their balance sheets. I'm an equal-opportunity blamer.
And yes, I blame those who were in charge of the big banks -- including my husband -- for not seeing the default tsunami coming. But almost no one did. Everyone knows this, yet financial CEOs have replaced the Mob as the most despised group in the country.
The good news is that Americans have short attention spans. Before long, some other group will come along to absorb all the frustration and anger.
Meanwhile, I'm off to the tailors to get some clothes altered. Shopping your closet is great unless you've put on a few pounds over the years. I've been holding out hope that fewer nights out could shrink me to fit back into some of the past warhorses of my wardrobe. Unfortunately, our appetite for comfort food has risen in proportion to the Dow's decline; the selloff this past month has upped our mac-and-cheese intake and created a sinecure for my seamstress.
What Determines Your Credit Score?
The New York Times had a recent article about credit scoring. Your credit score is a score that is determined by a company called Fair Issacs. The exact algorithm is a closely guarded secret but its a good indicator of your credit worthiness.
From what I've heard over the years, you should ideally have 4 lines of credit (credit cards, store cards or other loans) with less than 50% utilization for a better score. Also if you've had a credit card for years that you don't use and doesn't have a balance on it, don't close it. It just might lower your score. (Of course if you signed up for a gazillion cards in college and can't keep track of them, by all means close a few).
¶ 35 percent is determined by your payment history. Do you regularly pay your bills or fines on time to any creditor that submits your information to the credit bureau? Even unpaid library fines, medical bills or parking tickets may appear here.
¶ 30 percent is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out. If you’re maxing out your credit cards, your score may suffer.
¶ 15 percent is based on the length of your credit history, both how long you’ve had each account and how long it’s been since you had any activity on those accounts. The fewer and older the accounts, the better (assuming you’ve made timely payments).
¶ 10 percent is based on how many accounts you’ve recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you’ve applied for credit. Your score can drop if it looks as if you’re seeking several new sources of credit — a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.) Shopping around for an auto loan or mortgage shouldn’t hurt, if you keep your search to six weeks or less. But every inquiry you trigger when you apply for a credit card can affect your score, says Craig Watts, a spokesman for Fair Isaac. So be selective.
¶ The final 10 percent is determined by the types of credit used. Having installment debt — like a mortgage, in which you pay a fixed amount each month — demonstrates that you can manage a large loan. But how you handle revolving debt, like credit cards, tends to carry more weight since it’s seen as more predictive of future behavior. (You can pay off the balance each month or just the minimum, for example, charge to the limit of your cards or rarely use them.)
For the best rates on a loan or credit card, you want a score that’s above 700, at least. To achieve that, make sure to pay all your bills on time. It’s also a good idea to have at least one credit card you plan to use for a long time, but not too many. Keep a low balance — generally less than one-third of your total credit limit. Of course, it’s best to pay off your balance entirely each month. And stay on top of the information in your reports.
From what I've heard over the years, you should ideally have 4 lines of credit (credit cards, store cards or other loans) with less than 50% utilization for a better score. Also if you've had a credit card for years that you don't use and doesn't have a balance on it, don't close it. It just might lower your score. (Of course if you signed up for a gazillion cards in college and can't keep track of them, by all means close a few).
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