Fixed income gets medieval

Although the equity guys get the headlines, given that that this month's Spooz Swoon has taken the index back to "barely up on the year" territory (oh, the humanity!), spare a thought for those poor souls toiling in the classic macro crucible of short-end fixed income.

For today that market has well and truly gone medieval, sending EDZ5 shorts (including your correspondent) to the rack:



Note, gentle readers, that today EDZ5 has made an all time contract high.    Consider the panic button pushed, the stop losses executed, and the market's tail tucked firmly between its legs.  That 10 year yields printed on a 1.80 handle raises the question of what the Fed might hope to accomplish by re-introducing QE (as hinted by Williams the other day- that didn't take long!); they can hardly complain that the level of back end yields is stifling growth!

Not that the pain is exclusive to the US, mind you; the rally in some of the longer-term short sterling contracts has been truly breathtaking.  It's been said that there are two kinds of short sterling traders- those that have blown up and those that are going to.  We can probably add a few more names to the later list, it would appear.


(Thanks to FC for the chart)

Now, one of the wonderful things about trading short ends is that you can apply some sort of policy rate path 'valuation anchor' that doesn't really exist in equities, FX, or even long end government bonds.

Of course, a re-setting of the expected policy rate path is one of the costs of doing business in this market.   By the same token, it is also possible to mistake stop-loss pain-trade price action for just such a re-setting.   Macro Man suspects that that represents a lot of what we are seeing today.  He is therefore sticking to his valuation guns, albeit with the proviso that he'd like to see some semblance of normality before adding anything to a position.   Far better to sell 99.25 on the way down than 99.35 on the way up- at least if one plans on sleeping well at night.

In the meantime, he's going to take his time on the rack and try to manage it as comfortably as he can.
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wcw
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October 15, 2014 at 3:11 PM ×

Our head trader was bellowing 'time for a refi!' at the open today.

Maybe I'll call the credit union.

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Leftback
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October 15, 2014 at 3:23 PM ×

Exactly, I was watching this morning and seeing US10y yield plummet, I am thinking: "this is panic buying and complete capitulation by shorts". We haven't seen the likes of this in a while. These are the days when you have to lighten up a bit in fixed income and let other people have at it.

Remember those conversations we had here about the absurd spreads between US and Spain/Italy? So many signs back then that a sizable move was on the cards in Treasuries.

Those European oil companies are even cheaper today, C, but EURUSD is firmer on the back of the not unexpected weaker US retail and Empire State data. Look for the bounce in Euros to continue tomorrow before the long slide to parity continues.

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Anonymous
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October 15, 2014 at 4:03 PM ×

Bloomberg:Producer Prices in U.S. Decrease for First Time in a Year

2nd biggest monthly fall in NY manufacturing survey on record

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Anonymous
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October 15, 2014 at 4:05 PM ×

For the first time in a LONG time, can actually see deflationary pricing across many baskets. Drop a lot consumer tech. Drop AAPL. Raise dry powder. Ensure all liquidity lines are available.

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Anonymous
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October 15, 2014 at 4:12 PM ×

Keith McCullough "We're still looking for 1.7% on the 10yr"

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Leftback
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October 15, 2014 at 4:27 PM ×

Keith McCullough: "we're still looking for 1.7% on the 10y".

No comment.

Bonnie Baha of Doubleline was on TV today, a less frequently heard voice but quite thoughtful on the Fed, CB omnipotence, rate hikes and more QE.

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Nico G
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October 15, 2014 at 4:29 PM ×

i hope the 'nothing has changed there is too much at stakes CBs are here to help' dude from last week is sleeping ok. this is 2008 price action again, they proclaimed the death of volatility this summer and it did not take long for trading to get interesting again

when you see how high they have to go for every last bear to capitulate, imagine where this market can go to punish complacent bulls. 1900 was high and absurd enough. No, they had to shoot for 2000.

There was a very good call for 2000 spx in this forum before summer, i could not believe it would ever happen and it did. and then some, above 2000 the pundits had to move year end targets to 2200/2300.

fast forward a few weeks, Cramer is giving you 10 conditions for the selling to stop and a relief rally. one thing is sure: stupidity in form of greed and fear will NEVER end which i guess is always the silver lining in this cloudy industry

with proper stops and/or deep enough pockets you may make money in this market for ever- volatility was not dead into September it just smelt funny

there ain't a bear alive to cover here, and most bulls are shitting on the sideline, wary of re entering so you have no buyers and a lot of margin getting called every new day

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Nico G
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October 15, 2014 at 4:32 PM ×

PS: on a lighter note Russell is trying to catch a bid here

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Polemic
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October 15, 2014 at 4:42 PM ×

'That reset or washout' question is just as valid for oil prices. 15% in two weeks is hardly a move based on a change in fundamentals when applied to a market with real suppliers and end users.

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abee crombie
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October 15, 2014 at 4:44 PM ×

I too got killed on the Eurodollar short but I punched out on Monday. Too much convexity risk here. Like mm said better to wait for vol to blow off and then get in.

Not sure if this is 2008 price action just yet, ( remember 40 point days were the norm, we had a few 80 +). Feeling more like 2011, which is the playbook I am using. Wait for vol to spike above 30 before digging in

Check out Ieo etf. U.S. oil produces. Knife catching. ???

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Nico G
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October 15, 2014 at 4:49 PM ×

i still remember when oil traded down to $10. People were just busy punting internet stocks for the first time

oil was soo old economy, traders had no interest in it

it is weird to still read about people pondering oil fundamentals

oil is 99% speculation, period

so like Russian equities and so many other toys, buy when they buy, sell when they sell

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BrokenBanker
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October 15, 2014 at 5:25 PM ×

While not wishing to alarm anyone, and of course history does not repeat, but this is a moment to compare and contrast perhaps...

14/10/1987: DJIA -3.8%
15/10/1987: DJIA -2.4%
16/10/1987: DJIA -4.6%
19/10/1987: DJIA -22.6%

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Anonymous
admin
October 15, 2014 at 6:06 PM ×

Meanwhile, INR hasn't blinked? What gives? Lower gold and energy are positive?

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Anonymous
admin
October 15, 2014 at 6:12 PM ×

Capesize drybulker rates re-cratered...down 50% in last month alone

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Anonymous
admin
October 15, 2014 at 6:13 PM ×

Aug 2016 FF futures up .285 to 99.16 .. this vs 98.50 close just 8 trading sessions ago . Thats 2 1/2 rate hikes yanked out

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Anonymous
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October 15, 2014 at 6:20 PM ×

Current 5-day $VIX gain of 86.57% is 2nd largest run, dating back to 1990. Largest 5-day VIX gain was 102.87% (8/8/11)

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Anonymous
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October 15, 2014 at 6:22 PM ×

C says
"Fink offered a silver lining. He told CNBC that no more than one sovereign wealth fund has sold out of equities in the last six weeks, despite a series of global shocks sending the stock markets into a tailspin. "
Posted to put perspective on Amps' question re retail. It isn't retail who are the bagholders.
I suspect retail are now correlated to demographics - aging pop. Let me tell you you get old you take a different mindset. That mindset will have seen retail continue to disappear from equity risk at least to the degree that wealth holders tend to be older not younger. WE don't care that much about growth multiples ,we want income and we want stability. So I would guess any retail might likely be young pups still feeling their oats.

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Anonymous
admin
October 15, 2014 at 6:23 PM ×

VIX futures moving from backwardation to contango is the only all clear signal I trust. It looks like we are far away from that.
VIX (26.1) currently 14% above front month VIX futures and 23% above 2nd month futures. Next expiration 10/22

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Nico G
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October 15, 2014 at 6:28 PM ×

if that's not retail who else holds the current record NYSE margin a la 2000 and 2007

those are puking as we speak, there is no end to this until big pockets jump on the autumn sale

they always say 'there is so much liquidity around'

well let's see, funds who liked US equities at 2000 like it even more at 1900, 1700, 1500

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Anonymous
admin
October 15, 2014 at 6:28 PM ×

2yr back to 0.26% . Back to pre-taper lows ......

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Anonymous
admin
October 15, 2014 at 6:32 PM ×

C Says
Look on the brightside ,there should be plenty of space for Santas rally.

Nico,
Retail has a proportion of market activity started going downhill back in the 90's and given the pops we have had since as each of them got older they will been psychologically conditioned to take less not more equity risk. No, the puke may include retail ,but I really doubt they are the driving force anymore.

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Nico G
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October 15, 2014 at 6:34 PM ×

then it is a lot more serious

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Anonymous
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October 15, 2014 at 6:50 PM ×

$78 handles on crude futures after February till 2016
and new 26mo low in CRB index

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Macro Man
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October 15, 2014 at 7:00 PM ×

So when crude goes higher, the Fed gets dovish because of the negative real income shock. When crude goes lower, the Fed gets dovish because it's indicative of a weak economy/deflationary threat. What a scam....

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Anonymous
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October 15, 2014 at 7:07 PM ×

Lotsa green in big ships , coal and tech shorts like $GRPN $P as hedgies dump winners , cover shorts , lose both ways

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Anonymous
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October 15, 2014 at 7:20 PM ×

C says,
Nico if I had to guess this is mainly a function (not of retail) ,but what happens when a market is overly supported by corporate buy backs. Those things apparently so beloved of shareholders ,but which in reality really just perform a function of handoff.
There's been enough research I believe to support the conclusion that buybacks are invariably badly timed ,always overpaying.

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Anonymous
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October 15, 2014 at 7:30 PM ×

West Canada Select spot oil now $68 1/2

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Leftback
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October 15, 2014 at 7:54 PM ×

CDC has just announced that a new virus has been identified and is apparently quite contagious at the NYSE and the CBOT. It has been tentatively termed "NOPOMOLA" virus, and results in the infected traders hemorrhaging cash from the portfolio.

The action in bonds was truly eye-watering this morning. That was some serious Cold Steel for Mr Shorty, and you have to say well deserved for being such a really silly bunt. Hard to see any of the shorts clinging on after that visit to the proctologist, so you'd have to think maybe a medium term low in yields?

We are surely going to see more USD weakness in the days ahead as the whole US Decoupling thesis starts to unravel and the full extent of positioning becomes painfully apparent.

On a more serious note, the people who run local hospitals in the US are MBAs and MPHs, with little knowledge or experience of dangerous viruses, but a good understanding of the profit margins for lap band surgery and breast implants.

The revelations from Dallas are alarming but not surprising if you have seen these places operate. Look for centralization of Ebola patients at Emory and a few other professional academic centers now. The lower 25% of the medical school class is not very bright and that's who is staffing and running the Dallas Presbyterian Hospital.

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Leftback
admin
October 15, 2014 at 8:01 PM ×

This is a bit more 1987 than 2008. I am reminded of Barry Ritholtz's aphorism that "Crashes don't occur in over-bought markets, they happen in over-sold markets". There is more than one similarity between 2014 and 1987, notably the timing of expiration.

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Mr. T
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October 15, 2014 at 8:16 PM ×

I'm a bit surprised gold not had a better bump. Seems like everything is lining up for it - and with miners too with energy costs dropping.

How much stock did AAPL have to buy back today? Good grief. I think this is going to look like a colossal waste of capital in a couple years.

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Nico G
admin
October 15, 2014 at 8:26 PM ×

C, sure thing

see my post yesterday about 2014 buy back, and the 10 posts before, on the same topic. buy back works for the management team as long as people front run it - until folks crash your market and your stock options go mute with it. per essence the game is ill timed.

on the smaller side of things retail has been puking ever since Russell peaked, while google tesla kept bigger indices afloat - until them too start to roll over and you get current broad price action. This is the scary part, those darlings have so much still to catch down until their long term chart has killed the paraebola affecting them

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Leftback
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October 15, 2014 at 8:28 PM ×

Yeah, starting to like metals and miners here, if we are correct about the dollar putting in a Top.

Remember SPX 1960? Maybe we'll never see it again. We should have known this wasn't over yesterday when the 200 dma formed a ceiling and the market sold off swiftly after rejection at that level.

For those who like to take the p*ss, here's a bit of fun. A call for a "4% 10y by Thanksgiving" made in July. I don't think he trades for a living. Hope not. Here at Schadenfreude Capital we love these guys.

4% 10y by Thanksgiving

Ah, that takes me back to those epic James Caron Morgan Stanley calls for a 4% 10y. Stellar insight...

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Polemic
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October 15, 2014 at 8:32 PM ×

yes LB ,, and I can't see why everyone is buying Hazmat suit makers when they are provenly useless when inhabited by anyone less than a highly trained specialist.

Perhaps we buy the stock of hazmat training specialists rather than the suits themselves!

Interesting coments as to what things haven't moved today .. india gold and others, and though I hate to try to talk my 'not yet into, waiting for 27th Oct' book, I really don't think this is 1987, 2000, or even 2011/12 re europe.

It's another positional wash out based in the most high levered sectors that has probably overrun in most of them ( EDZ5, SPX, Greek stocks, oil).

As for all the companies suffering because of low oil/energy prices, there are probably three more rubbing their hands. Manufacturers have just been given a windfall and I can't see them racing to pass it on.

Roll up and sell vix while you can .. last chase before markets double red hot poker everyone by giving the worst possible outcome - a sharp return to all those 2014 trades of the year that have been stopped and reversed in the last couple of months.

And, as for short term US rate moves, seriously guys, what is the point of finessing every word of every statement when you get moves both ways as we have had recently which obliterate every nuance with nuclear strikes.

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Macro Man
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October 15, 2014 at 8:33 PM ×

@ Mr. T re: AAPL. Well, it's a business that throws off silly amounts of cash but that doesn't (and cannot) grow quickly enough to justify using all that cash on capex. So they can let it rot on the balance sheet (bad idea in ZIRP world), pay a dividend, or buy back stock. One can reasonably argue that they should pay a dividend instead of buying so much stock, but from management's perspective they a) avoid immediate p.a. tax hit from buybacks relative to divvys, and b) make their EPS bogies easier by reducing S.

Obviously, if the time value of money still meant something, there would be more incentive to hold cash on the BS, but ZIRP is all about encouraging economic actors top 'move out the risk spectrum',. regardless of how foolish that may be....

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Polemic
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October 15, 2014 at 8:46 PM ×

Aaaaaand the Nasdaq is green .. It's gone very very quiet in the Bear stands.

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Nico G
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October 15, 2014 at 8:48 PM ×

i have downgraded my bounce target to 1918 spx and 3078 stoxx whatever comes first

SPX just wanted to show how 200 points can be spent away without even a sweat

You know I thug 'em, fuck 'em, love 'em, leave 'em
'Cause I don't fuckin' need 'em

that indice is such a pimp, always the show off

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Macro Man
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October 15, 2014 at 8:48 PM ×

The old-skool "30 VIX = the bottom" heuristic has worked a treat, this afternoon at least!

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Leftback
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October 15, 2014 at 8:52 PM ×

Today was a very good day to let people buy a few treats that one has been sitting on for a long time, and enjoy the moment of profit taking at the same time. After all, one gets a better price for one's umbrella when it is raining.

Amazing vol in fixed income today, and that did look like a V-shaped reversal in US10s. It might be a few months before we see that kind of panic buying again.

Not going to put the cash to work just yet, not with the clown show going on in Washington. Let's wait until they all shut up and study the USD while watching European energy, emerging markets, metals and miners with increasing interest.

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Nico G
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October 15, 2014 at 9:08 PM ×

at intraday low Eurostoxx was burning more than 5% today

the 50 biggest caps of Europe - am flat like a Dover sole

i'd say the weak hands have capish and a rare breed of momentum shorts have covered today

all eyes are on a bounce. or lack thereof

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Anonymous
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October 16, 2014 at 1:49 AM ×

@LB, you remind me of the old saying -- "What to they call the person who graduates at the bottom of the class in Medical School? Doctor"

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Anonymous
admin
October 16, 2014 at 2:21 AM ×

my first post here. i very much enjoy the blog MM and all the regulars who comment here, one of my favorite places in the blogosphere so thanks to all.
today was the craziest i have seen for many years. bonds ripping higher on what looked like *massive* capitulation from stubborn shorts who have lent into this rally from 3% all the way back down. 36bps of travel in 10s...just a regular day? i dont think so
as a bond guy ill stick to what i know best with my comments. there is not a scenario i can see over the next couple of weeks into the FOMC where we do not take another run at the highs we saw today in 10s (1.87%). one can point to any number of things be it the fundamental (global growth worries be it europe, china, disinflation, strength in the DXY, etc etc) or the technical with everyone positioned the wrong way on the belief in a US decoupling but really what jumps out at me the most is how much this past few weeks of px action jives with what we've seen in the past as the Fed winds down QE. overlay a chart of gt10, spx and the Fed b/s and it shows you what happens to the market as they who giveth liquidity to the market taketh away. to put it into fedspeak, if the flow of QE works via the portfolio rebalancing channel, compressing risk premia and forcing investors out the risk spectrum in search of yield and return...then is what we see in the absence of QE just the reversal of that? something to ponder.
in any event..when i look ahead to where USTs may go i would say do not short bonds until we have conviction that the Feds pain point has been reached and theyre coming back for another round of QE. given the apparent lack of political appetite within the Fed and quite frankly the credibility risk associated with pulling such a huge u-turn in expected policy such short fashion.. so i suppose may take a while until the market is begging for it. as i said, im a bond guy, but if this plays out how i expect then the rebalancing reversal taking place now puts in my mind significant downside to spx, IG & HY..and further upside to USTs

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Anonymous
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October 16, 2014 at 6:37 AM ×

one of the wonderful things about trading short ends is that you can apply some sort of policy rate path 'valuation anchor' that doesn't really exist in equities, FX, or even long end government bond

i mentioned that to my erstwhile mentor once and he replied "that's why the blowups are always bigger in the short end"

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Anonymous
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October 16, 2014 at 9:05 AM ×

Anyone still see USGG10YR >3% in 12 months?

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Anonymous
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October 16, 2014 at 10:42 AM ×

Anyone still see USGG10YR >3% in 12 months?

Of course, someone always sees it >3% in 12 months.

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theta
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October 18, 2014 at 11:14 PM ×

Macro man, don't you think there's a decent chance rates stay at zero throughout 2015? After all, the world's biggest economy is about to start exporting deflation to the rest of the world.

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theta
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October 18, 2014 at 11:16 PM ×

Oh and please, pretty please, with sugar on top, can you remove the banner on the top left of the page that makes it impossible to read the page on a mobile device?

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Knobby McKnobb
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October 20, 2014 at 3:03 PM ×

USGG10y >4% by the end of the year. U-S-A !!!

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