Jim Bianco Profile picture
Apr 9 7 tweets 4 min read Read on X
Something has broken tonight in the bond market. We are seeing a disorderly liquidation.

If I had to GUESS, the basis trade is in full unwind.

Since Friday's close to now ... the 30-year yield is up 56 bps, in three trading days.

The last time this yield rose this much in 3 days (close to close) was January 7, 1982, when the yield was 14%.

This kind of historic move is caused by a forced liquidation, not human managers make decisions about the outlook for rates at midnight ET.Image
It keeps going, the 30-year yield is now 5.00%!

As chart shows, since Sunday Night, 54 hours ago, the 30-year is up 67 basis points. Cannot find a move like this in my database.

The only overlay is the 30-year Gily blowing up during the Liz Truss moment" in September 2022. That was 130 bos in 5 days. We are now 67 bps 2 1/2 days.Image
S&P futures are down another 100 points or 2% tonight as I write. This sell-off might not be about tariffs but on the realization that the bond market is broken/breaking.

Markets are fragile. Tariffs broke the bond market and now this decline is about this realization.
---

A liquation is underway and must be completed, losing positions have to be exited, not supported or ignored.

Cutting rates and making financing rates cheaper in the middle of this kind of liquidation, encourages speculation ... exactly what is not needed in the middle of such a move.

I think the market knows this which is why the chart below shows only a 63% probability of a cut in rates in a month. Not intra-meeting! Rates cuts are not the answer.

The Fed restarting QE to artificially raise bond prices will only cement the belief that a massive spike in inflation is coming.

This is not a problem that can be fixed with "printing." It was years of "printing" that encouraged the massive build-up in speculation that is now being forced to liquidate.

You cannot drink yourself sober. You can encourage speculation by cutting rates/WE to stop a speculative unwind.Image
I don't think this is China selling bonds to "punish" the US over rates.

There are no good daily statistics to measure this. But I still contend that if this were happening, the dollar would be declining. The Dollar Index (DXY) is up since Thursday's low, suggesting net foreign buying is coming into the US market.
---
Above said, technically, China could be selling and keeping their money in overnight repo accounts. If they did this, it says two things ...

1. They are not afraid to dump Treasuries and drive up yields and punish, but they are afraid to take the cash from these Treasury sales and convert it to another currency (dump dollars). Why is it ok to crush the bond market but not the currency market? (Answer, it does not make sense)

2. If they are selling Treasuries and continue to park them in US repo accounts, they are not really serious about punishing the US.

Again, the most logical answer is that they are not the primary seller of Treasury, if they are a seller at all.Image
By the way the US Treasury has an auction of $39 billion of 10-year notes on Wednesday and $22 billion of 30-year bonds on Thursday.

Should be "interesting" to see who wants these Treasuries in the middle of this chaos.
Another sign of how broken things are ...

Since Liberation Day, Crude oil has collapsed 21%. At $57, it is at its lowest level since April 2021 ... or the lowest point since the Ukraine War started in March 2022.

As noted above, over the last three days, bond yields are soaring the most in 40 years.

Restated, bond prices and crude are both crashing together at the same time.

UnprecedentedImage
When the world's largest and most important bond market breaks/is dysfunctional ... knock on effects happen.

*JAPAN’S 40-YR YIELD RISES 32BPS TO HIGHEST SINCE DEBUT IN 2007

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More from @biancoresearch

Oct 20
1/5

Over the weekend I posted the thread below noting that liquidity was getting “worrisome.”

On Thursday, SOFR was 4.30%, for a spread over IOR of 12 bps (the widest such spread since March 2020, not shown).

(All this is explained in the reposted thread.)
2/5

This morning Friday’s SOFR was reported at 4.18%, down 12 bps. (SOFR is reported every morning for the previous day.)

So, is the liquidity problem now over? Not exactly.

Here is a version of the last above, but it only shows the last 6 months, and the SOFR/IOR spread in the bottom panel is daily (not a moving average).Image
3/5

See the average in the first (repost) chart above, the SOFR/IOR averaged -8 bps back to 2022. See the chart immediately above, the SOFR/IOR averaged -5 bps.

A “normal” liquidity environment is one where the SOFR/IOR spread is around -8 to -5 bps. See the last five or six weeks, lots of “green bars” (positive SOFR/IOR spread). With some “red bars” interspersed in between. In Wall Street parlance, this spread “random walks” so look to the larger trend, not day to day movements.

What the larger trend shows is this measure of liquidity is still “worrisome.” Not a crisis, but worrisome. And note that over the last few months trend is moving toward larger green bars.
Read 5 tweets
Oct 18
1/6

Are Banks Having a Liquidity Problem?

tl:dr, Liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

When the financial plumbing gets stressed, it is when bad loans (aka "cockroaches") get noticed.

(long thread, tried to write it so "normies" can follow.)
---

Wall Street is famous for diagnosing symptoms, not causes. I believe they are doing this again with the banking issues of the last few days., I do not think this is a "cockroach" problem (bad credit/loans) waiting to get disclosed publicly.

It is a liquidity problem that makes the "cockroaches" matter.

Banks (all 4,000+) hand out a trillion in loans. So, they will always have "cockroaches." So, it is not an issue of whether cockroaches exist; they always do. Instead, it is the environment in which such disclosures are made. Does the market care or not?

Now it cares. Why?

---

@NickTimiraos said below:

How to define "temporary" and "modest." Repo rates in the last two days have moved up to the top of the fed-funds range and around 10 bps above IORB, but it's only been two days.

---

I would argue it has not "only" been two days; worsening liquidity in the funding market has been unfolding for weeks. It just got noticed in the last two days.

This chart shows Secured Overnight Financing Rate, or SOFR (orange), and Interest on Reserves, or IOR (blue). The bottom panel shows the spread between these two, along with some metrics (dashed line = average, shaded area = standard deviation range).

See the arrow; this spread (3-day average, so it is less noisy) has been tightening for weeks. This spread moved to positive territory in early September and has remained there for weeks. The last time it was positive for this long was in March 2020 (not shown).Image
2/6

A positive spread is typical around month- and quarter-end "window dressing," when financial institutions need to report their positions and want to show conservative cash positions. Now it has been weeks, and it is in the middle of the month.

This chart shows that liquidity has been worsening for weeks. It was two days ago that it finally got noticed.

But note that Jay Powell noticed it, because in his speech to the NABE Conference three days ago:

Some signs have begun to emerge that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.

SOFR replaced Libor (London InterBank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get iInterbank Offer Rate) two years ago; it is the rate charged in the funding markets (that is, financial institutions that need cash and will borrow to get it) for overnight loans collateralized by Treasury Bills) on overnight loans collateralized by Treasury Bill ("Secured"). So these loans carry no credit risk. They are compared to the IOR rate, which is the interest rate the Federal Reserve pays banks on their reserve balances. This means that the spread between SOFR and IOR is purely driven by supply and demand. SOFR comprises three components.

* General Collateral repo Loans
* Tri-party repo (biggest part)
* Fixed Income Clearing Corporation (FICC) cleared bilateral repo

As the bottom panel shows, the SOFR market is now $3 trillion of overnight loans a day. It has doubled in the last two years.

The SOFR market has never been bigger (strong demand), and spreads are moving higher (insufficient supply).Image
3/6

In a normal SOFR market, when the balance between supply/demand is maintained, SOFR loans should trade at a slight discount to IOR rates (see the average and standard deviation range in the bottom panel of the spread chart in the first post). This is because IOR should act as a ceiling on money rates. Banks will not lend out below the IOR rate. Why should they when parking money (reserves) at the Fed offers a better rate?

In a normal market, non-bank (broker/dealers, money market funds, and Government-Sponsored Enterprises, or GSEs, etc.) with money to lend, who cannot park it at the Fed to get IOR rates, will offer it at slightly lower than the IOR rate to anyone that needs cash (to settle trades, needs to put up margin on derivatives, or money for other transactions). They will offer a better deal than IOR, so they do not have to compete with banks for interest on their cash.

Typically, eight basis points below IOR will do it (as the bottom panel shows in the first post), which is the same spread Dallas Fed President Lorie Logan noted in Timiroas' tweet above. Note that before the Dallas Fed, Logan ran the NY Fed Open Market Desk.)

In other words, a negative spread indicates that funding markets are "liquid" and functioning normally. Conversely, an uptrend in the SOFR/IOR spread, which tips to a positive spread, indicates that the supply of cash (aka liquidity) is falling behind the demand for money. So the price (rate) is rising relative to the IOR benchmark.

Restated, liquidity in the plumbing of the financial system is getting scarce. It is not a crisis now, but it has been moving in this direction for weeks, and it is now at a worrisome point.

Remember, financial institutions are highly leveraged; these seemingly little moves can have a significant impact on the P&L and capital ratios.

Why Now?

Why is this happening now? And why should we believe the uptrend in SOFR/IOR will not stop its two-month uptrend?

The answer to the first question is Quantitative Tightening (QT). This is the Fed pulling out liquidity since 2022 by reducing its balance sheet.Image
Read 6 tweets
Oct 6
1/4

JP Morgan has identified 41 "AI-Related" stocks.

As this chart shows, they are now 45% of the S&P 500. Image
2/4

A list of the stocks Image
3/4

ChatGPT was released on November 29, 2022.

Since this date, these 41 stocks have accounted for 70% of the increase in the S&P 500's value (blue). The other 30% came from the remaining 359 stocks (orange) Image
Read 5 tweets
Sep 1
1/6

Recessions and financial crises can have a profound and lasting impact on an economy for years to come.

We had both in 2020. This changed the economy.

Change does not mean worse or dystopian. It means different. This economy differs from 2019 (pre-COVID).
🧵
2/6

Following every recession, the tenor of inflation shifts.

The current post-COVID recovery, as shown in blue, indicates inflation has reached a significantly higher level, with more volatility (wider standard deviation) than during the post-financial crisis period. Image
3/6

Something more may be at play, as larger trends in inflation seem to have shifted with the COVID pandemic. Image
Read 6 tweets
Aug 31
1/8

In this post about rising inflation, some replies suggest that housing prices are falling, which will help hold down inflation.

The problem is that most metrics are saying home prices are booming to all-time highs. This is why we have an "affordability" crisis.

🧵
2/8

Case-Shiller National Home Price Index.

All-time high. Image
3/8

Median home price

Seasonally adjusted, all-time high Image
Read 8 tweets
Aug 17
Home prices have been 🚀 for years.

The problem is not mortgage rates, it's inventory (not enough).

Cut rates and home sellers raise prices, and monthly payments remain unchanged. The affordability problem remains. Greedy boomer homeowners get richer.

How to fix affordability?

Reduce zoning and building regulations to increase inventory. The problem is that selfish boomer homeowners wield these laws to restrict supply and drive up the price of their homes.Image
The Atlanta Federal Reserve calculates a Housing Affordability Monitor.

The median income in the United States (blue) and the income needed to qualify for a mortgage (detailed below the chart). The bottom panel shows the difference.

At 58%, this means one needs 58% more than the median income ($ 83k) to qualify for a median mortgage ($ 130k).

This is a new record, even greater than the peak before the housing crash from 2007 to 2009.

Home prices are too high. Cutting mortgage rates will only incentivize home sellers to increase their asking prices, and the problem persists.

We need more supply, that is what the record "unaffordability" is saying..Image
A home is considered “affordable” if it costs less than 30% of a household’s income.

The following chart indicates that the average home in the United States now costs 47% of the median household’s monthly income.

An all-time record, surpassing the bubble peak in 2006 before the housing crash.Image
Read 4 tweets

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