The title of this article comes from an operation very similar to Quantitative Easing engineered by the Federal Reserve System in the 60's, called Operation TWIST, which ended in a resounding failure and the panic abandon of the gold standard in 1971.
Operation TWIST: To Boldly Go Where We Have Gone Before: Repeating the Interest Rate Mistakes of the Past by Adam M. Zaretsky of the Federal Reserve Bank of St. Louis.
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).
We had a splendid Hammer on August 25th on 10 Years US Treasury Notes:
On Friday we made a fantastic Runaway Gap from Thursday between 2.639% and 2.650%.
On the Yield of the US Treasury Bonds:
3.900% is the previous minimum, at the beginning of the last wave.
4.1500% is the minimum ever reached before the Great Recession.
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.
The Federal Reserve System will necessarily misinterpret (or want us to 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
Last Treasuries Yield Curve on September 3rd (green) and
Last minimum of the Treasuries Yield Curve on August 25th (orange).
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.
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.
As market participants will misinterpret the steepening of the yield curve stock indices will continue to go up till Sept. 7th.
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).
The Market Crash: Be Prepared.
Post Crash Economy - Economic Non Compliance Week.
The Post Crash Economy
The Religious Interpretation of Employment, Interest, and Money.
Libertarians Against Credit.
Muslims Against Credit With Interest.
שנה טובה ומתוקה
Disclosure: No Positions
Disclosure: No Positions