Category Archives: yield

now that the rates have risen, the banks will lend

In theory banks lend to make money.  When rates are higher, they lend more.

Now examine these two graphs.  The first chart is from marketwatch.  It shows the 10 year treasury over the last 5 years.  The rates had steadily declined till recently.













The next chart examines total debt payment / income and debt / income.   This chart  should make it clear that banks did in fact tighten their lending standards as record low interest rates were being set.











The question remains if banks will operate in a converse manner as rates rise…  Ie.  Lend more as rates rise.  Rising rates may cause a greater rise in asset value.




Investment grade yield

Corporate yields are extremely low considering 10 year treasuries are still hovering around 1.6%. This yield clearly shows an inverse relationship with American Equity values.

What does all this mean? The world investor clearly has faith in the American Dollar and Financial system. While it is one thing for Treasuries to have low yield, it is another when both treasuries and corporate bonds are low in unison. The balance sheet for both the treasury and corporations must be looking good.

There is one area of concern though. MBS loans have been gobbled up by the Feds. Thus leaving little room outside of treasuries and corporate bonds for fixed investments. In essence, the Fed’s purchases may continue to force investors to invest in risky assets such as Corporate debt as opposed to collateralized obligations.

 I love WebStory!

corporate cash hoarding and low interest rates

The Economist recently provided a primer on the existence of low interest rates while corporations continue to hoard cash.  Our current circumstance can be broken into two contrasting philosophies, provided that you are a believer of open market signaling.

1)The private sector may be signaling that there is little ROI if they were to invest in training, capital equipment, and research and development.  As a result, it may be wise for the government to follow a similar strategy.

2)The private sector may be hoarding cash and treasuries in hopes of driving interest rates down so that the government can fund investments into infrastructure and r&d.

The first philosophy appears to be the strategy that was employed since the millennium.  The second appears to be a more hopeful and ideological philosophy that had be employed in many nations around the world post WWII.  There may be a resurgence in this.

It is very difficult to think of capital improvement projects in America.  Let me know if you have any ideas.


 Yields contin…


Yields continue to drop with euro and oil.  It makes sense.  The strong euro has long supported high oil prices.

It really looks like global de-leveraging will end soon.  Obviously, if governments keep bailing out banks, the banks will continue to contract the money supply.  Yet, once the bailouts end, there really is no incentive to de-leverage.

Once pensions and social security are trimmed, governments will have incentive to leverage/inflate again to collect tax revenue.  Is the time coming?  Maybe not today, but it has to be somewhere between today and 10 years from now.

i’m looking at 60 equity – 40 fixed on the short end of the yield curve for now.

Flash Crash

So the headline statesA Single Sale Worth $4.1 Billion Led to the ‘Flash Crash’”.

It is interesting to see the “cause” of the crash, but how could it ever happen?  Arbitragers had boatloads to benefit by jumping in.. or did they?

After reading a recent article/blog about an individual losing $100k in a month of Forex trading, it became crystal clear to me why the “arbitragers” let events like this occur.  Fortunately the blogger was quite frank.  He lost all his money during “stop-losses” on days he did not pay attention to trading.

While I had always known about “stop-loss”, or subtly read about the literature, I had no idea that so many investors used such a tactic.  As a result, it is pretty darn obvious why professional traders let the crash occur.  They simply ate the lunch of all the casuals with “stop-loss” trades that were left open.

This same phenomena also occurs with “limit orders” that casual investors always argue with me about.  These individual investors always think they are getting a better deal by setting up a limit order.  They are continuely blinded by the fact that market markers do not touch their limit order  arbitrage arises.  I think of it as the reverse stop-loss effect.   It isn’t very difficult for a trader/programmer to figure out who you are, when you have a weird looking limit order that sits there for minutes/hours/days at a time.

So what was the flash crash really?  A simple highway robbery from reckless day-traders.

Credit Unions + tax breaks + Obama

Lets examine a couple events that occurred this week.

1. Governments Seize Three Credit Unions.

2. $50 Billion Credit Union toxic securities resold with government backing.

3. Small Business may snub $30 Billion loan

While #3 is titled poorly, many of the mentions in the article are interesting.

Chase said the bank already has enough capital to meet the paltry demand for loans. “Our business customers are mired in uncertainty and are reluctant to invest in their businesses.

Sounds like this bank is investing in treasuries instead of businesses..

Next clip.

The $30 billion fund will be run by the Treasury Department, and money will be awarded to banks deemed strong by regulators. Banks that have less than $10 billion in assets are eligible.

Community banks will have to pay an annual dividend of 5 percent to the U.S. Treasury. However, when banks increase their lending to small businesses, their dividend rate declines on a sliding scale. So, if a bank increases its small-business lending portfolio by 2.5 percent, the dividend payment goes down to 4 percent and so on, said Paul Merski, chief economist at the Independent Community Bankers of America, the lobbying group for small banks.

The dividend payment increases to 7 percent if banks don’t lend to small businesses.

Look out below fellas.  The feds shut down bad credit unions, removed their toxic assets, and are now offering an “incentive” structure for small banks to loan money to businesses.

What business/bank would be opposed to such opportunity…?  Obviously, large banks and big companies…

Examine the movement last week in small caps…  Not a coincidence, and no it wasn’t the durable good order.

everyone is an expert on japan

It may have been a victory lap of sorts. One day after the ruling Democratic Party of Japan leadership contest was resolved in prime minister Naoto Kan’s favour, the Japanese government intervened in the currency market to weaken the yen. While the move is a welcome escape from Tokyo’s policy paralysis, its significance is more political than economic.

Sureeee.  Then read this.

Foreign exchange interventions are more likely to stick if deployed in co-ordination with other countries and when they target speculative bets rather than fundamental market forces. As long as the Japanese allow chronically lower inflation than their trading partners, they must get used to irrepressible upward pressure on their nominal exchange rate. As fattening trade surpluses and historical comparisons show, the real exchange rate is hardly overvalued.

Doesn’t the author get it?  Currency rates can determine inflation, just as much as inflation can determine rates.  If Japan is successfully able to weaken their currency, then they will have inflation.

Ever since the Volker era, it has been much easier to control inflation through currency.   The raising of rates in the 80’s was simply that.  A currency intervention tactic.  No  coordination required.

Do people really think the world has coordinated the deflation that has occurred in japan?

they didn’t like the tax break

Obama releases a proposal to give investment tax breaks to corporations.  All in the name of boosting the economy.  The financial markets and writers reacted pretty quickly.  A big thumbs down.  Bond holders aren’t here to finance pork barrel bills.

Obviously equities rallied and treasury bonds suffered.  I’m sure the administration will get it sorted out.