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Yield Curve Steepens Dramatically: What's Going On?

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Posted by Mike Shedlock

on Wednesday, 20 December 2017 07:17

US treasuries are seeing action we have not seen for a while: Strong sharp steepening of the yield curve.

Screen Shot 2017-12-20 at 7.22.46 AM

The yield curve is said to steepen when the spreads between short-term and long-term rates increases. The yield curve flattens when spreads shrink.

  • A bearish steepener occurs when rates are rising and long-term yields are rising more than short-term rates. Spreads widen.
  • A bullish steepener occurs when rates are falling and short-term rates are falling faster than long-term rates. Spreads widen.
  • A bullish flattener occurs when rates are falling and long-term rates are falling faster than short-term rates. Spreads narrow.
  • A bearish flattener occurs when rates are rising and short-term rates are rising faster than long-term rates. Spreads narrow.

The terms bearish and bullish refer to capital gains (bullish) or losses (bearish) if one is invested in government bonds.

Bearish Steepener Meaning

A bearish steepener is generally a sign that market participants believe the economy is getting stronger and the Fed (Central Bank), will be hiking rates faster than previously anticipated or more than anticipated.

What Happened Today?



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Bonds & Interest Rates

Stephen Poloz Right To Be Worried

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Posted by Peter Diekmeyer - Sprott Money

on Monday, 18 December 2017 06:43

Bank of Canada governor Stephen Poloz cited numerous worries plaguing the economy during his speech to Toronto’s financial elites yesterday at the prestigious Canadian Club. 

However, the title of Poloz’s presentation, “Three things keeping me awake at night” seemed odd, given positive recent Canadian employment, GDP and other data. 

Poloz highlighted high personal debts, housing prices, cryptocurrencies and other causes for concern, along with actions that the BoC is taking to alleviate them. His implicit message was (as always) “We have things under control.” 

But if that’s all true, then Canada’s central bank governor should be sleeping like a baby. So, what is really keeping Mr. Poloz up at night? Three possibilities come to mind. 

The Poloz Bubble 

Firstly, far from just a housing bubble, Canada’s economy shows signs of being in the midst of an “everything bubble.” Bitcoin, for example, hovered near CDN $23,000 this week. Stock and bond valuations are not far behind in their relative loftiness. 

Worse for Poloz, who took office four years ago, his fingerprints are all over those bubble-like levels. 

Canadian stock, bond and house prices were already at dizzying heights when Stephen Harper hired Poloz with the implicit expectation that he would juice up the economy, in preparation for what Canada’s then-Prime Minister knew would be a tough upcoming election. 

Poloz didn’t disappoint, promptly delivering a nice Benjamin Strong-styled “coup de whiskey” to asset prices in the form of two interest rate cuts, which brought the BoC’s policy rate down to just 0.50% during the ensuing months. 

Although Harper lost the election, loose BoC policy continues to provide the Canadian government with free money to borrow and spend as it wishes. 

More broadly, the Poloz BoC’s current policy, like that of the US Federal Reserve, is to boost asset prices even higher in the hope that the resulting wealth effect will trickle down to spur economic activity among ordinary Canadians. 

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Bonds & Interest Rates

Albert Edwards: "Why The Current Situation Is Even Worse Than The 2008 Crisis"

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Posted by ZeroHedge

on Monday, 11 December 2017 06:40

Back in May, we first reported that Goldman became the first bank to dare to ask if the Fed has lost control of the market, if in slightly more polite terms of course. This is how Jan Hatzius phrased it: "Despite two rate hikes and indications of impending balance sheet runoff, financial conditions have continued to loosen in recent months. Our financial conditions index is now about 50bp below its November 2016 average and near the easiest levels of the past two years." Several months later, after the third rate hike, Goldman found that once again, paradoxically, financial conditions eased further, and the market rose even more in direct opposition of what Fed rate hikes are supposed to do!

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Fast forward to this weekend, when we reported that that lovely word which describes the new normal so well -"paradox" - made a repeat appearance, this time in the last quarterly report by the Bank of International Settlement, which for the nth time issued an alert on the state of the stock market, an alert which will be summarily ignored by everyone until after the crash, and reminded everyone what happened the last time financial conditions eased instead of tightening when the Fed hiked rates (spoiler alert: biggest crash in modern history). This is what the BIS' chief economist Claudio Borio said (among other things)"

....continue reading HERE



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Bonds & Interest Rates

Trump & Taxes

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Posted by Martin Armstrong - Armstrong Economics

on Thursday, 07 December 2017 06:52

QUESTION: Do you support Trump increasing the debt by a trillion dollars? I thought you were conservative?

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ANSWER: Well the first thing you have to do is get a grip on what is a reality. Governments around the globe borrow every single year with absolutely no intention of ever paying off their national debts. So what is the difference? If you think giving the money back to the people is wrong and it is better going out the back door for political contributions, then sorry, I oppose that.

There is no “conservative” v “liberal” when it comes to the debt. They all spend more than they take in and nobody cares about paying off the debts. So I do not care what political persuasion you are, we will end up at the same place when the dice stop rolling. BROKE!

US-Debt-accumulated-Interest-as-Percent-of-total-768x541

I support cutting income taxes to ZERO. The government should just create the money it needs to cover its expenses. Let’s get real here! All national debts, including Germany, show that on average 70% of the debt is just accumulative interest. So that is money out the back-door.

Rome never had a national debt and the first 500 years they existed by creating money to pay their expenses with minimal inflation because of the economic growth. About 80% of their budget was paid with the creation of new money.

Even the Bible said giving 10% was realistic, not 40% to 60% as we have under the current Marxist style governments in the West.

The first country that wakes up and abolishes income taxes will blow everyone else out of the water. All they have to do is say they will adopt the way the United States became great. There were only indirect taxes between 1792 and 1913. If the nation survived with no income taxes, we can do it again and let the people spend their own money. You will see massive job creation and governments will stop competing with the private sector to borrow money.

....also from Martin:

How China will Surpass the West



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Bonds & Interest Rates

The Boom Continues

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Posted by Steve Saville - The Speculative Investorvestor

on Monday, 04 December 2017 06:31

The US economic boom is still in progress, where a boom is defined as a period during which monetary inflation and the suppression of interest rates create the false impression of a growing/healthy economy*. We know that it is still in progress because the gap between 10-year and 2-year Treasury yields — our favourite proxy for the US yield curve — continues to shrink and is now the narrowest it has been in 10 years.

yieldcurve 241117

Reiterating an explanation we’ve provided numerous times in the past, an important characteristic of a boom is an increasing desire to borrow short to lend/invest long. This puts upward pressure on short-term interest rates relative to long-term interest rates, which is why economic booms are associated with flattening yield curves. The following chart shows the accelerating upward trend in the US 2-year yield that was the driving force behind the recent sharp reduction in the 10yr-2yr yield spread.



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