/biz/ - Business & Finance

[Anonymous No.3223014]

Yesterday I made a thread about the US Fed and some people were saying that if the interest rates for 2y treasuries rise above the 10y treasury rate then equities are done for. Can someone explain why a positive 2y/10y ratio would be bad for equities?

[Anonymous No.3223073]

The capital outflow from equities into 2Y bonds

[Anonymous No.3223130]

>>3223073
Wouldn't capital outflow only occur if 2y rates were higher than the equity market yearly returns?

[Anonymous No.3223161]

>>3223014
because it's a really bad fucking sign when the backing government of the reserve currency of international finance has to pay more on its 2 year debt than 10 year

complete guess btw, don't know if any of this shit is true

[Anonymous No.3223214]

>>3223014
When short term rates are higher than long term rates, it becomes very hard to banks to make money by lending, which accounts for most of their revenue. banks won't lend cheap = bad for equities

Additionally, the FED is planning to /unwind/ it's balance sheet. Meaning they're going to dump the 1.8 trillion in equities they've been buying over the last 9 years back into the market. Throwing that much NEW money into equities has contributed to the bull run we've seen for the last 9 years.

What do you think will happen as they bleed out their 1.8 trillion dollar positions the next 4 years?

[Anonymous No.3223263]

>>3223014
Sry, i only know about kryptotrading

[Anonymous No.3223274]

>>3223214

If they can sell off their positions without causing the 2y/10y ratio to be positive then would equities continue their performance or is it a simple matter of economics that the bull run of the last 9 years fuelled by QE will have bullshit called on it as soon as they begin to unwind and the whole thing explodes?

Is there any positive view on the US equities market?

[Anonymous No.3223365]

>>3223214
>Meaning they're going to dump the 1.8 trillion in equities
>1.8 trillion in equities
What rigged bullshit market!
They have literally equities on their book which they bought with Monopoly money to artificially support the market?

[Anonymous No.3223373]

>>3223014

Inverted yield curves are generally the first major sign that a recession is coming

[Anonymous No.3223410]

>>3223365
>to artificially support the market
You have no idea what kind of catastrophe they prevented, do you?

[Anonymous No.3223416]

>>3223373
This. The yield curve represents investor's inflationary expectations. If the curve inverts that means that investors are more eager to lock up their money longer term at a lower yield than short term, and are therefore expecting deflation. Deflation is not good for asset prices.

[Anonymous No.3223419]

>>3223274
In addition to their 1.8 trillion in equity. They have ~2.2 trillion in US T Bonds. Again, they've established that amount through 9 years of money printing WHILE interest rates, or bond return rates, where near 0.

Now they're going to stop pumping money into US T Bonds. They're also going to raise rates over the next 4 years, with a goal of adding 300 basis points, 3%, to the current rate by the end of this 4 year bleed period.

The 10 year T Bond rates are locked in at that near 0 rate. So they will look cheaper compared to the short term rates. Even as aggregate demand for the bonds decreases.

BTW about 900 billion in interest will by paid to the FED by the US government for the first time next year. That's literally just their interest payment.
>Is there any positive view on the US equities market?
I can't find one.

>>3223365
Yeah you can't make this shit up. >>3223410 Basically this. BUT I Think they went a little overboard with the whole borrowing from the future thing.

[Anonymous No.3223521]

>>3223419

This graph looks like it is a bit of a leading indicator of recession. https://fred.stlouisfed.org/series/T10Y2Y

Once it drops below zero it seems that a recession in the next 24 months is likely.

Currently we are above zero but trending toward zero. It also seems that the figure spikes back up most of the time after dropping below zero and then the recession hits as that spike gains momentum. What causes this spike after the drop below zero?

From a timing perspective can we expect equities to continue to perform until that ratio dips below zero at which point it is time to start leaving equity positions?

Seems like nothing good happens to equities once that ratio dips below zero.

[Anonymous No.3223666]

>>3223521
>at causes this spike after the drop below zero?
Pretty sure it's time. Or some government intervention that I'm not aware of. As time passes, those 10 year bonds start being priced in the higher interest rates. But I guess that wouldn't account for the sharp spike, only the gradual normalization of the 2y/10y relationship. not quite sure.

>timing
Hard question man. That graph certainly suggests what you're thinking. This time around the FED seems to know what is going to happen and they're trying to bring the plane down for an emergency landing as soft as possible. If they can do that successfully, there may not be a crash like we've seen. I certainly think we've nearly seen the last of consistent YOY bull markets, instead i personally expect little to no growth once rates are raised and short/long bond prices are flat. We're really in uncharted waters. There is not a history to look back on for the specific financial situation we're in right now. Shorting banks will be a great way to make money I think, unless the market already priced in what I'm thinking.

[Anonymous No.3223976]

>>3223666

I heard Steve Eismann (fwiw) speaking on CNBC or one of those shows and he is long US banks as he see the potential changes to the Volcker rule as positive, allowing for banks to lever themselves up a bit. Not to the levels pre-GFC but to a level higher that when he gave the interview (sometime last year) was higher than present. He saw this leverage allowing for US banks to lever up their earnings.

Have you seen anyone making any specific shorts that could point to an other systematic issue? Someone's thesis that concretes some of the economic possibilities we could be reasonably subject to?

[the bosx imperial ruler of the(...) No.3224080]

>>3223130
bonds are safer than equities , which is what "Whales" really care about even more than return.

it will likely have an outflow in proportion to the adjustment .

[Anonymous No.3224921]

bump

[Anonymous No.3225656]

bump for interest

[Anonymous No.3226707]

saving, gonna answer

[Anonymous No.3226789]

In that thread, you might remember the mentioning of "Yield to Maturity", and how the Fed's operations impact treasury yields. The same principle applies in this case. The reason for it happening occurs because of market expectations of what the Fed will do, in terms of which way the Fed will attempt to manipulate interest rates (up or down).

The Fed goes about manipulating interest rates through the Fed Funds Rate, which is what banks charge each other, when lending to each other to meet something known as "Reserve Requirements": https://www.thebalance.com/how-does-the-fed-raise-or-lower-interest-rates-3306127

The Fed raises and lowers interest rates through the fed funds rate: https://www.thebalance.com/fed-funds-rate-definition-impact-and-how-it-works-3306122, and it does this based on economic conditions, particularly inflation indicators.

The market tries to price in its expectations for what the Fed will do (whether it'll raise or lower interest rates). The market forms its expectations based on economic data, again, inflation indicators are important. If inflation is trending up (inflation which is driven by Aggregate Demand), the market will expect rates to increase. If Aggregate Demand driven inflation is decreasing (or increasing at a slower rate than expected), the market will expect rates to decrease, or remain unchanged.

The market can implement these expectations through the treasuries market. And this is where the link to Yield to Maturity comes in.

If growth in the economy is slowing and inflation is no longer growing, the market decrease its demand of shorter term treasury securities, and will increase its demand of longer term securities. Prices of shorter term securities decrease (higher Yield to Maturity develops), prices of longer term securities increase (lower YTM develops).

Treasury buyers act in this manner for many reasons, but one of the main ones is that since people believe interest rates will not increase, they'd cont...

[Anonymous No.3226796]

...lock in securities which will provide them with a better return, for the long run (as interest rates will trend lower as the Fed may not increase rates/may lower rates, if indicators are looking bad), rather than allocating much money on shorter term securities which provide lower returns, relative to longer term securities (this is due to people usually expecting greater return from longer term lending, than they do from shorter term lending).

This results in the Yield Curve "inverting".

[Anonymous No.3226848]

In terms of direct stock market impact, firstly, money is likely flowing out of the stock market, and into longer term treasuries, but also, decreasing growth in the economy will EVENTUALLY impact company earnings. This will lead to the stock market pricing this in, accordingly (theoretically).

[Anonymous No.3226899]

>>3223410
>prevented

They only postponed it and when it happens it will be even bigger

[Anonymous No.3226922]

>>3226789
>(inflation which is driven by Aggregate Demand)

Expanding on this, they use some CPI measures, but also Wage Inflation.

These are just some of the indicators used.

[Anonymous No.3227004]

>>3223214
>they're going to dump
they're not going to DUMP anything
a lot of those securities could simply expire and they can choose to not reinvest
that would cut the balance sheet in half already

people are going to lose so much money trying to frantically time the market based on their interpretation of what the Fed plans to do

and I intend to sit back and watch and laugh

[Anonymous No.3227072]

>>3223214

Do you have a source for your 1.8 trillion equity claim?

[Anonymous No.3227401]

>>3223214

The federal reserve owns zero equities though. They own bonds and mortgage securities.

[Anonymous No.3227418]

>>3223410

They didnt prevent anything. They propped up a broken market. Housing would be affordable and people would be having kids if they let the bust correct the market. Now everyone is doubling up in one bedrooms or living with parents like poorfags.

[Anonymous No.3227434]

>>3223419

The fed is owned by the government so its paying interest to itself.

[Anonymous No.3227665]

Just saw this posted on r/finance: http://www.financeapprise.com/ecb-quantitative-easing-program-failed-raise-inflation/

If you guys are here, Hi :)

[Anonymous No.3227689]

>>3227418
come on anon
there's so much more to cultural shifts than the housing market
kids are garbage and so is providing for dependopotami and it's much more comfy living in your childhood bedroom forever

[Anonymous No.3228270]

>>3227418
>>if they let the bust correct the market.

I guess the 10 year great depression wasn't long enough to teach you this doesn't happen. The nominal rigidity for wages and assests would have prevented a correction coming in a timely manner and things would be much worse right now.