10Y Yield Crashes Below 1.00%, Stocks Plunge Despite Massive Fed Easing

Jim,

It seems that Fed’s move to cut 50 bp in not helping to push up the market. All three major stock index are down more than 3% and 10 year treasury yield is now below 1%

https://www.cnbc.com/2020/03/03/treasury-yields-rise-after-stimulus-hopes-lift-risk-on-sentiment.html

Regards
James

James,

Thank you. What do you think the yield being that low means as far as market direction or chances of recession?

Best,

Jim

Jim,

In addition to the VIX short term risk off indicator, another medium term risk-off indicator that I send you before (when working on the csv factor with Georg), ##CORPBBBOAS (the spread between AAA US treasuries and BBB corporate bonds) will also switch to risk-off in about two days if everything stays around the current level.

If that happens, I think the market will continue to go down for a while and a much higher chance for recession.

Regards
James

Isn’t this just “selling the news” ? And isn’t this also the realization that all “ammos” are now used up to counter the fear induced selling?

All is left now is the real world virus news, good or bad. Not some financial manipulations.

PS. got at least two calls from banks , and many emails, that want to lend money to us. Perhaps I should take some if the rates are really low. But will I be able to spend it if no one shows up to work ?

Jim,

I think Macro maybe right.

Buy on rumour (Mon), Sell on news (Today) after the G7 joint phone call and Fed rate cut.

It may also be a good idea to lock-in the low interest rate with a fixed rate loan from banks. (for your medical practice as well in prepartion for future expansion)

Regards
James

For what it’s worth, Timing the Market with Google Trends Search Volume Data for Debt shows a large increase for February which resulted in the model to signal on Mar-1 to exit stocks.


Georg,

Did you get my email message?

Pls send me the csv for your 5 hedge fund portolio. (I understand your concern and will not share it.)

We can continue to share information going forward.

Thanks

Regards
James

The low rate means nothing. We’ve long ago departed the world in which ups and downs of interest rates can influence economic activity. See, e.g., Marco’s musings on the low-rate loans being offered to him.

As things stand now, whether there is or isn’t a recession in particular places, or globally, depends on whether on whether Coronavirus suppresses business activity enough to make that happen. Watch the virus, not the Fed.

Actually, on second thought, there may be a collateral risk that if the Coronavirus eases, will the economy be threatened by the Fed having floored it when it comes to liquidity, or the prospect that the Fed may perceive this and slam the brakes too abruptly. So I guess the Fed is a secondary source of risk.

We may also have to come to grips with the likelihood of a contested Democratic convention.

Jim

The medium term risk off indicator that we discussed earlier will switch to risk-off tomorrow. The last time it switch to risk-off was between 2018/11/30 - 2019/2/8. Based on that, I guess I will remain investing fully in 50/50 (GLD/TLT) for the next three months at least.

This indicator which is based on the ICE BofA US Corporate BBB Option-Adjusted Spread tracked by FRED (Fed St Louis) has never been wrong (not even once) since that data was first released in 1996.

I will send you the excel spreadsheet via email for reference.

Regards
James

James, Thank you! Got it.-Jim

Jim,

I am surprised to see that TLT is up more than 5% as the 30-year Treasury yield hit a fresh record low of 1.259%.

As some experts say, the bond market has a PhD while the stock market has a high school diploma.

It is always better to follow the signal of the bond market.

Regards
James

James, I am beginning to fully appreciate that. -Jim

I personally use TLT options as a hedge, but I make sure to roll them over after a certain percentage gain to limit downside risk and lock in returns.

hi Jeffrey,
Why you are using TLT option as hedge instead of SPY put? Cost is lower?

gs3

What is the best book, blog,
video for safe option trading for holding periods 3 to 6 months.
Like SPY Long, TLT Long. Super safe option trading.

Thanks
Kumar

is anyone still buying TLT? What’s the most you can earn if you own it for 10 years?? What’s the ceiling there?

I prefer to hedge with call options of other assets rather than with puts for the following reasons:

  1. As you mentioned, put options are generally more expensive than call options. I actually buy 95+ delta options so that the option ends up having less than a 1 or 2 percent time delta cost as a percent of the underlying. That way the option acts more like a leveraged ETF than a decaying ATM option. So in my case I have been buying TLT and GLD which cost 1/10 of the underlying. I effectively get 10x leverage then.

  2. The other reason is that buying put options against SPY will always work against your gains. Over time with call options in other assets they may work against you at times, but often the will appreciate along with SPY. Just look at GLD and TLT the last year. They have all gone up. Plus if you can simulate SPY puts you would realize that the cost to your portfolio gains over time is horrendous.

Now I have been using put options on SPY as of late to try to hedge against multi-asset crash. I wouldn’t normally do this but market volatility and overpricing points to that high risk. The way I am doing it is more a volatility play than anything and so far I have recouped my small initial investment so it’s a matter of rolling it out and taking some profits along the way. The problem is that when a crash happens everything sells in a desperate grab for liquidity. Essentially everything goes to a correlation of one. We have already seen hints of this intermittently over the past couple weeks. That includes gold, real estate, maybe even long term bonds (it hasn’t yet, but could). At that point a put option on SPY or holding cash is the only thing that will preserve or appreciate in price.

With all that said if you are holding positions on margin this is a very bad time to do that, because you won’t be able to hedge or diversify away from the systemic risk unless you are buying straight up puts against your underlying assets, but that in itself is costly.

Jeff

Roughly 1.3% as of Friday. No longer a great investment at this time in and of itself. It may be better to look at the shorter end (2 year or 3 to 7 year range) even with lower yields. You aren’t going to accumulate much higher interest rates with long term treasuries and the effects of inflation risk are higher with long duration bonds. Long term bond values are much more sensitive to interest rate increases and/or inflation.

I’m not still buying TLT, but I sold stocks and bought an even mix of TLT and IEF on Monday, leaving about half in cash for now. I’m not expecting to hold them long-term, say a year or more, so my reason to buy them is not just the underlying bond interest rates but the relative safety versus common stocks right now. TLT is up about 7% for my purchases while IEF is up about 2.3%.

The price of outstanding bonds go up when new bonds are only available that pay a lower rate. And the effect is relative to a certain extent. If risk and all else is equal, a bond paying 10% will normally be worth twice one paying 5%. When the rate environment changes and the best rate is 5%, bonds paying 5% will be worth twice those paying 2.5%. So the ETF prices can still go up (or down) significantly at low interest rates.

I suspect TLT has been more popular than IEF recently because it does hold bonds paying a higher rate and some are expecting to hold it longer.

What will kill the long term treasury is if inflation surprises. That could very well happen if the Fed continues to inject liquidity in the face of supply chain disruptions where the money could be arguably less effective and even detrimental. I am visualizing the scenario whereby the fed and government have flushed the system with cash whereby market participants are competing for a more limited supply of goods due to supply chain crunches from Coronavirus. Now that scenario doesn’t seem likely at this moment but a quick reflation after a period of deflation which it appears we are experiencing could lead to that scenario. Stocks and commodities would rebound massively of course, but treasuries could really be hammered. There is always the risk of both contraction and growth. Risk off assets (treasuries, gold) are only risk off in so far as they are the counter of risk on assets (stocks, junk bonds, etc).