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Update on the Nemesis

Yesterday I wrote an article stating that the bottom of long-term yield would be probably on Sept. 8th. It was a mistake I want to correct here:

There is a secular downtrend on long-term yields date from 1981 when the 30 Years US Treasury Bonds was 14.5%. That article explains why it ended today at 10:00 AM EST with that yield reaching 3.543%.

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Long-term yields can be conceived as some sort of (complicated) options of short-term yields (with a strike of 0% and a value of the underlying asset equal to the implied volatility of short-term rates over the period). As such they have a fair value when short term rate are 0% at a given (implied) volatility. My evaluation of these yields are 4.60% for the 30 Years US Treasury Bonds and 3.60% for the 10 Years US treasury Notes.

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Because these options are difficult to arbitrage when undervalued (complicated) and because banks are structurally longs in long-term investments (it is their jobs after all). These yields can be undervalued for quite a long time particularly when pushed down artificially by Quantitative Easing.

However these undervalued yields become unsustainable when they get too far from their fair value or stable equilibrium. Any crash we know of came from a sudden normalization of the yield curve.

My personal evaluation of that "too small" yields come from the observation of the 30 Years US treasury Yields shortly after the minimum reached after the bottom of the Great Recession.

I concluded that these unsustainable low yields should be between anything below 3.60% range for the 30 Years US Treasury Bonds and 2.50% for the 10 Years US Treasury Notes.

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Although these yields are necessary to generate the prevalent slow growth I conclude that now a return to their stable long-term equilibrium is in the way.

Although dismal news are in the pipeline long term rates  bottomed as the undervaluation of long term yield became unsustainable from an option valuation point of view..

This will have dramatic financial and economic consequences:

First an increase of long-term yields with no increase of expected profits will necessarily translate in a sharp fall in stock values. It is the mechanism,of any market crash we have witnessed. Anyone familiar with financial mathematics know that present value are much more sensitive for low yields than they are for high yields. So the amplitude of that crash will be bigger than anything we have witnessed yet.

Second the fact that yields would go significantly higher means that the available funds for investments necessary for fueling the prevalent weak economy will suddenly disappear creating a sharp decrease of money supply (M3) and investments and hence a sharp drop of GDP employement, prices and profits.

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Third that increase in unemployement and higher deflation expectation will decrease consumption.

Those will be compounded with the previously discussed drop of stock values.This discontinuous behavior of long-term yields will generate a catastrophic behavior of stock markets and of the economy.


I said in my previous article that the most probable date of that bottom would be September 8th, 9th . That was a mistake (which has not cost money to my readers. In fact given the two gaps on long-term yields we already made and the low we reached today with a capitulation of the bonds sellers we already made that low as they have already reached my unsustainable zone. I expect today a one day island reversal on the 10 Years US Treasury Notes.

From here Yields on long dated treasuries should slowly go up whereas yields on corporate and junk bonds will jump. Corporations won't be able to finance their business anymore.

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The nemesis should reach us shortly after Sept. 9th and the next 10 Years US Treasury Notes and 30 Years US Treasury Bonds auctions. Probably on the Quadruple Witching Hours.

The Market Crash: Be PreparedOn Facebook 469 are ready.

I will, soon after the crash, on this Facebook page, publish a video on September 22nd and propose my solution to the collapse of this economy.

Disclosure: No Positions