Trump Optimism Effect Gone In The Treasury Yield Curve, But Not in 10y Treasury Yields and 30Y Mortgage Rates

There was a burst of enthusiasm in capital markets surrounding Donald Trump’s election as US President. It was a hope for economic growth, higher paying jobs and undoing President Obama’s regulatory overreach.

But alas, continued stonewalling in Congress by Democrats (and RINOS) as well as threats of impeachment over Russia have killed off enthusian in the US Treasury 10Y-2Y yield curve. As you can see, the 10Y-2Y Treasury curve slope is now lower than before the November 8th election.

But that optimism effect has not declined appreciably in the 10 year Treasury and 3o year mortgage rate. The optimism effect has gradually declined to Nov 14th level, several days after the election.

While there has been a downward drift in the 10 year Treasury yield, The Federal Reserve has been merrily raising their Fed Funds Target Rate twice since the election, helping to flatten the 10Y-2Y curve.

With another rate increase expected at the next FOMC meeting on June 14th (90% likelihood), we should be a further flattening of the 10Y-2Y Treasury curve (ceteris paribus) and a further decline in the Trump optimism effect.

And there is a 6% chance that we could see a rate CUT at the July FOMC meeting.

Janet Yellen: “I swear that I will not raise rates and spook investors more than once, unless Donald Trump is elected.”

Have Mortgage Applications Peaked For 2017? Purchase Applications Fall 2.75% WoW (Up 9% YoY), Refi Apps Fall 5.7%


Mortgage applications decreased 4.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 12, 2017.

The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 3 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Typically, applications for a purchase mortgage peak in May (sometimes in April, sometimes in June). So, last week’s mortgage purchase applications print may have been the high water mark for 2017.

The Refinance Index decreased 6 percent from the previous week.  But notice that while mortgage refinancing applications plummeted aroud MayJune rapid the rise in the Freddie Mac 30 year mortgage survey rate (thanks to Fed Chair Bernanke saying that The Fed might end their asset purchase programs), the recent rise in the 30 year mortgage rate has produced decline in refi application.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($424,100 or less) remained unchanged at 4.23 percent, with points increasing to 0.37 from 0.31 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

Mortgage originations have not recovered to previous levels due to the amazing disappearance of subprime (sub 620 credit score) lending,

So, we at (or near) the peak for 2017 in terms of mortgage purchase applications. Historically, it will be all down hill until January 2018. But a 9% increase in mortgage purchases applications YoY is pretty impressive!


OCC: Citigroups Leads Bank Holding Companies With $22 Trillion In Derivatives Exposure (Mizuho Leads In Derivative-To-Assets of 12,000%!)

The Office of the Comptroller of the Currency (OCC) has released the Derivatives Exposure for bank holding companies.

Of the top ten bank holding companies, Citigroup leads in total derivatives exposure (futures, options, forwards, swaps, credit derivatives, etc). Citi is closely followed by JPMorgan Chase, Goldman Sachs, Bank of America and Morgan Stanley.

In terms of derivative exposure to assets, Japan’s Mizuho leads with a whopping 12,136.54%. Followed by Goldman Sachs at 4,792.91% and Morgan Stanley at 3,505.69%. Wells Fargo is has the lowest derivatives to assset ratio of the top ten holding companies.

In terms of credit derivatives, JPMorgan Chase leads, followed by Citi. State Street actually has no credit risk exposure.

Of course, as long as there is no sudden shock (or even slow m0ving disaster … like collapsing home prices and a surge in mortgage defaults), everything is copacetic. But in case of a shock, counter party risk rears its head (such as in ‘The Big Short” where problems occured in shorting  Credit Default Swaps, at least momentarily). Or an insurer like AIG not being to pay off on its Credit Default Swaps claims.

Now that the US banking system is highly concentrated,

we shouldn’t see the same pattern of bank failures that we have seen in previous financial crises, like the financial crisis of 2007-2012.

Did someone mention Stanley? With a derivative-to-asset ratio of 3.505%, (Morgan) Stanley should be happy!

Venezuela’s 99.5% Currency Plunge Shows Why Protests Rage (Highest 2Y and 10Y Sovereign Yield In World)

Well, a 99.5% currency plunge isn’t the ONLY reason why protests are a daily occurrence in Venezuela.

(Bloomberg) — President Nicolas Maduro has overseen an unprecedented depreciation in his country’s currency since taking office, with the bolivar now down 99.5 percent to 5,100 per dollar in the black market that everyday Venezuelans use. The sharp decline has wiped out savings and made buying imported goods all but impossible, helping fuel the anger directed at the government in street protests that have turned deadly in recent weeks. While Maduro has raised the minimum wage almost 20 times during his tenure, it’s still the equivalent of just $40 a month.

Yes, the blackmarket currency which many Venezuelans use has actually fallen 99.5% under Maduro.

Say, The US Federal Reserve’s destruction of the purchasing power of the dollar since The Fed’s creation looks absolutely sedate compared to Maduro’s Bolivar destruction.

Here is the OFFICIAL CPI YoY for Venezuela (last reported at the end of 2015 and it was 181%). Things have gotten far worse since then.

Of course, Maduro and his pals have effectively destroyed the once productive oil industry (by replacing competent managers with political hacks). Then we have the nationalization of the the auto industry, forced production of goods (like ordering bakeries not to produce desserts and only produce bread), etc.  Very reminiscint of the old Soviet Union — a command rather than a demand economy.

Venezuela’s 2 year sovereign yield (in US dollars) is the highest in the world at 37%.

And Venezuela’s 10 year sovereign yield is also the world’s highest at 23.8% (once again, denomiated in US Dollars).

Venezuela sovereign yield curve is steeply downward sloping, as is their credit default swap (CDS) curve. Their 5Y CDS is at over 7,000 at the 6 month mark.

What a complete and utter disaster the once thriving Venezuelan economy has become under the dynamic duo of Hugo Chavez and Nicolas Maduro.

Here is Venezulan President Nicolas Maduro singing “Wasted Days and Wasted Nights” about economic progress under his iron-fisted rule.


Trump Optimism Bubble Almost Gone In 10Y-2Y Treasury Curve Slope (On The Good Ship Bubble Pop …)

When Donald Trump was elected on November 8, 2016, investors were overjoyed at the thought of deregulating the economy, repealing Obamacare and (at least) parts of the Dodd-Frank financial regulations.

But as time passes and investors realize that there is considerable resistance in Congress to doing most anything, the 10Y-2Y Treasury yield curve slope has almost returned to where it was on election day.

The likelihood of a Fed Funds Target Rate increase at tomorrow’s FOMC meeting is 12.8% according to Fed Funds futures.

But it looks like the Fed Funds rate will be increasing.

Hopefully future rate increases don’t pop our asset bubbles!

Fed Chair Janet Yellen on the good ship Bubble Pop,