The Long Term Investor

There are definately some GAMES being played with the interest rates and Treasuries. I mentioned some theories a day or two ago about the band regulations and reserves. I think this little article pretty well nails what is going on with the rate craziness lately.

Here we go again: Turmoil rocks the repo market

https://www.cnn.com/2021/03/04/investing/wall-street-repo-market-fed/index.html

(BOLD is my opinion OR what I consider important content)

"The repo market, a murky yet crucial corner of Wall Street, is acting weird again. And the turmoil suggests the Federal Reserve may need to come to the rescue once more.

The Dow, GameStop and bitcoin steal a lot of headlines, but the repo market is vital to the functioning of modern finance. Trillions of dollars of short-term loans, known as "repos," are traded each day.

The greatest risk to everything the Fed is trying to achieve in terms of stimulating growth and reaching full employment is too high of US interest rates. That would tip the apple cart."

Mark Cabana, head of rates strategy at Bank of America

Normally, these trades happen in the background, with little fanfare. But every once in a while, the system breaks down, as it did in late 2019 and again a year ago. This is another one of those moments.

The rate to borrow 10-year Treasuries in the repo market plunged to minus-4% this week, a very rare occurrence. That means investors are essentially paying to borrow 10-year bonds, when normally it's the other way around.
So why is this happening? It's a symptom of uncertainty over how fast the US economy will recover, how long the Fed will keep its emergency policies in place and the vast amounts of debt Uncle Sam has piled on during the pandemic.

Crowded short bets

With Wall Street economists sharply raising their GDP estimates, investors have started placing massive bets that Treasury rates will rise sharply. One way to express that view is to short Treasuries. (When Treasury prices drop, their rates go higher.) To carry out that trade, hedge funds are borrowing Treasuries in the repo market, selling them and agreeing to buy them back, ideally at a lower price so they can pocket the difference.

But these bets are creating intense demand in the repo market for 10-year Treasuries that can be shorted.
"This turmoil is being caused by the bond market swinging around as people realign their views on the economy," said Scott Skyrm, executive vice president in fixed income and repo at Curvature Securities.
The 10-year Treasury rate spiked to 1.6% last week, well above the low last March of around 0.3%.

'Game of cat-and-mouse'

Wall Street is essentially testing the Fed, pushing to see how high the central bank will allow rates to rise before stepping in.
"It's a game of cat-and-mouse," said Mark Cabana, head of rates strategy at Bank of America. "The market is challenging the Fed. The Fed is being a little coy and basically telling the market, 'Go sort it out.'"

But the Fed doesn't want to harm the recovery or spook Wall Street.
If rates rise sharply, it would raise the cost of everything from mortgages and car loans to junk bonds.
And US stocks tumbled last week as Treasury rates spiked. Higher yields on ultra-safe government bonds would steal thunder from riskier assets like stocks.

"It will reach a tipping point where it has negative financial market consequences," Cabana said.

The overheating debate

Yet higher rates would also signal that the US economy is finally getting back to normal after more than a decade of slow growth and anemic inflation.

"They want the economy to overheat," former New York Fed President Bill Dudley told CNN Business earlier this week.
Dudley said 1.6% Treasury rates are "nothing" and predicted yields will eventually climb to between 3% and 4% — or even higher.

"The bond market right now is a little bit unrealistic about their expectations for the Fed. They certainly want the Fed to stop this," said Dudley, who was previously a top economist at Goldman Sachs. "And I think the Fed's view is, no. We're not going to stop this. This is normal. This is what happens when the economy looks like it's going to actually recover."

Cabana said Dudley, whom he respects from their time working together at the NY Fed, may be taking too much of an academic approach.

"The greatest risk to everything the Fed is trying to achieve in terms of stimulating growth and reaching full employment is too high US interest rates," Cabana said. "That would tip the apple cart."

The Fed's Hotel California problem

When the repo market blew up in the fall of 2019, the NY Fed came to the rescue by promising to inject billions of dollars into the markets. The so-called overnight repo operations successfully calmed markets down, until they erupted again during the shock of the pandemic last spring.

The Fed would probably like to take a hands-off approach this time as it seeks to slowly retreat from crisis mode.
However, Cabana doesn't think that will happen, in part because of the enormous federal budget deficits created by the pandemic and efforts to revive the economy.
To finance the deficit, Washington needs to keep issuing Treasuries — and the Fed has been the biggest buyer of these bonds. The Fed is purchasing about $80 billion of Treasuries every month through its quantitative easing (QE) program.

"The Fed will have to increase its footprint in markets. That's how this ends," Cabana said.
One possibility is the Fed could further ramp up its already-massive QE program. Another option is reviving Operation Twist, a post-2008 crisis tool designed to suppress long-term rates.

All of this underscores how difficult it is for the Fed to unwind its emergency policies.
"It's the Fed's Hotel California problem," Cabana said. "You can check out, but you can never leave."

MT COMMENT

In my opinion this completely explains the sudden moves in the Ten year Treasury. It is NOT investors moving to Treasuries. It is......the HEDGE FUNDS....of course.....shorting treasuries. In doing so they are creating ARTIFICIAL demand for the Ten year Treasury in order to do their short trades.

You will RARELY see this sort of stuff mentioned in the media. It is obscure and beyond the analytical skills of most of the media people. Plus it DOES NOT drive the fear and panic view of things that is the source of ALL media clicks.

 

ACTUALLY....Rustic1 you are.....in fact..... very insecure with how you act and post on this thread.

AND....your few weeks of posting on here with absolutely NO concrete examples of anything dont prove sh*t. I dont give a lot of credibility to someone that was nearly driven into bankruptcy by THEIR OWN stock investing. Obviously a total failure in stock picking, risk analysis, and rationality.

In short you are the thread........A-hole....every thread has one. You dont just discus or talk about your strategy.....you are compelled to come here and harangue people that you know do not agree with you. People come here because they are interested in long term investing. You do it out of insecurity and in an attempt to confirm how you invest.

You have been on this thread for about....what...a month? Most of what you post is UNINTELLIGIBLE and IRRATIONAL garbage that is simply harassment toward others.......thinly veiled....but obvious. You NEVER post trades.......or anything else concrete. It is just all RASPBERRIES when the market is down......to people like myself and others that do not care in the slightest what the market is doing day to day. You have some of the most negative and nasty (sexually) posts toward others on here.

My mom told me to never...FEED THE TROLLS....on the internet.....just leave them under the bridge. So that is what I will do. This is my last comment about or toward you.....stay.....leave....I dont care. Just try to be less of an A-hole......please.

 

A red day today....of course.....thanks Chairman Powell. DEAD even with the SP500 today. My winners today were SNOW and GOOGL. I suspect that Powell poisoned the markets for tomorrow and that this week will be a write off. IRRELEVANT when I look back in a year or two at a chart of any of the averages. The TOTAL focus as usual.....the long term.

 

For those that like economic policy discussion.....a little article for you.

What Are the New Inflation Hawks Thinking?

https://www.project-syndicate.org/c...-policy-normalcy-by-j-bradford-delong-2021-03

(BOLD is my opinion OR what I consider important content)

"BERKELEY – Back in 1992, Lawrence H. Summers, then the chief economist at the World Bank, and I warned that pushing the US Federal Reserve’s annual inflation target down from 4% to 2% risked causing big problems. Not only was the 4% target not producing any discontent, but a 2% target would increase the risk of the Fed’s interest-rate policy hitting the zero lower bound.

Our objections went unheeded. Fed Chair Alan Greenspan reduced the inflation target to 2%, and we have been paying for it ever since. I have long thought that many of our economic problems would go away if we could rejigger asset markets in such a way as to make a 5% federal funds rate consistent with full employment in the late stage of a business cycle.There are three ways to accomplish this.

One is to raise the inflation target back to the 4% range that prevailed during Fed Chair Paul Volcker’s tenure. Another is to boost demand so that a late-cycle federal funds rate of 5% would still be consistent with strong investment. And a third option is to flood the market with safe Treasury assets so that the safe-asset price premium on Treasuries falls, thereby allowing the late-cycle federal funds rate to increase.

When US President Joe Biden won the 2020 election and proposed his $1.9 trillion relief, rescue, support, and stimulus package, I welcomed it. If it passes, a substantial chunk of the money will go to people who could really use it, and the economy will have a better chance of returning rapidly to full employment after a year of plague and lockdowns.To be sure, it would be better if a much larger share of the American Rescue Plan went to public investment. But unless one could be confident that ten Republican Senators would be open to a public-investment push, one should not allow the perfect to become the enemy of the good. Besides, the package would lend itself to pursuing the third option – flooding the market with safe assets – so what’s not to like?Apparently, there is enough not to like that many commentators whom I respect and admire have come out in opposition to the $1.9 trillion plan. I am not referring to professional Republican economists who always put partisan considerations before evidence, but to widely respected voices such as Summers and former IMF Chief Economist Olivier Blanchard. In a recent, widely circulated commentary for The Washington Post, Summers contends that:
“… while there are enormous uncertainties, there is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation, with consequences for the value of the dollar and financial stability. This will be manageable if monetary and fiscal policy can be rapidly adjusted to address the problem. But given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply. Stimulus measures of the magnitude contemplated are steps into the unknown.”

Summers and Blanchard fear that, by de-anchoring long-term inflation expectations, the amount of stimulus being proposed could create inflationary pressures that the Fed will be unable to contain without causing a recession. They are not alone. Harold James and Markus Brunnermeier of Princeton University and Jean-Pierre Landau of Sciences Po note that a “new and dangerous worldwide inflationary consensus” is emerging. Moreover, the American Enterprise Institute’s Michael R. Strain argues that Fed interest-rate increases should be avoided because “confidence in the Fed’s ability to fine-tune the economy is misplaced. When the unemployment rate goes up a little, it tends to go up a lot.”

What are we to make of these warnings? From what I can see, they all reflect a fear that the Fed might have to hike the federal funds rate and return it to the range we used to consider normal. I say “might” because, as the aforementioned critics acknowledge, any inflationary pressures generated by the $1.9 trillion package remain merely a possibility, not a certainty. It is equally likely that the new spending will end up filling holes in aggregate demand.

In any case, if the past 15 years of debates about “secular stagnation” and “global savings gluts” have taught us anything, it is that we should want to create the conditions in which a higher federal funds rate is warranted. The only explanation I can see for the new inflation hawks’ opposition to the size of the American Rescue Plan is that they do not trust that the Fed will raise interest rates when it becomes necessary to do so.As such, they seem to want to keep the warranted federal funds rate at the zero lower bound indefinitely, out of a fear that it will at some point exceed the market rate. But that makes no sense, particularly as an argument against additional support for struggling US households.

MY COMMENT

I remember very well the years in the 1970's and into the 1980's when a 4% rate of inflation target was considered NORMAL.....and a rate of 2% was considered TOO low.

 

HERE are the COSTCO numbers that I have been waiting for...they posted earnings today after the close.
Costco posts Q2 revenue beat, online sales surge 75.8%

https://finance.yahoo.com/news/costco-q-2-earnings-results-213727509.html

(BOLD is my opinion OR what I consider important content)
Costco (COST) reported better-than-expected second-quarter revenue after the closing bell on Thursday, benefitting from a strong holiday season and a continuation in the stay-at-home trend.

Here are the results versus the estimates, according to Bloomberg:

• Revenue: $44.77 billion vs. $43.8 billion expected
• Adjusted EPS: $2.14 vs. $2.45 expected

For the second quarter ended Feb. 14, the membership warehouse retailer reported total revenues of $44.77 billion, compared to $39.07 billion a year ago. Membership fees accounted for $881 million of total revenue, versus $816 million a year ago. Net sales for the second quarter increased 14.7%, to $43.89 billion, compared to $38.26 billion last year.

Costco reported earnings per share of $2.14, which included 41 cents in costs incurred from COVID-19 premium wages, the retailer noted. This week, Costco boosted its starting minimum wage by $1 to $16 an hour.

E-commerce surged 75.8% during the quarter versus a year ago.

Comparable store sales came in at 13% for the quarter, with comp sales in the U.S. growing 11.4%, while Canada and other international grew 13.4% and 21.5%, respectively.

Shares of Costco dipped 0.09%, or 29 cents, to last trade near $318.75 in the after-hours session.

MY COMMENT

NO DOUBT they will be down tomorrow......just the usual custom.....for GREAT EARNINGS. They SIMPLY...blew away the estimates including EPS when the increase in wages cost is factored in. A great company that will continue to be.....EXACTLY THE SAME....after the pandemic. Their customers are very loyal and are NOT there due to the pandemic. They SIMPLY like the great prices and products that they can get at Costco. It is the go-to place for dads and moms in the suburbs with kids and has been for many years.