GLOBAL ECONOMICS AND POLITICS

Leo Haviland provides clients with original, provocative, cutting-edge fundamental supply/demand and technical research on major financial marketplaces and trends. He also offers independent consulting and risk management advice.

Haviland’s expertise is macro. He focuses on the intertwining of equity, debt, currency, and commodity arenas, including the political players, regulatory approaches, social factors, and rhetoric that affect them. In a changing and dynamic global economy, Haviland’s mission remains constant – to give timely, value-added marketplace insights and foresights.

Leo Haviland has three decades of experience in the Wall Street trading environment. He has worked for Goldman Sachs, Sempra Energy Trading, and other institutions. In his research and sales career in stock, interest rate, foreign exchange, and commodity battlefields, he has dealt with numerous and diverse financial institutions and individuals. Haviland is a graduate of the University of Chicago (Phi Beta Kappa) and the Cornell Law School.


 

Subscribe to Leo Haviland’s BLOG to receive updates and new marketplace essays.

RSS View Leo Haviland's LinkedIn profile View Leo Haviland’s profile





TWO-STEPPING: US GOVERNMENT SECURITIES © Leo Haviland December 1, 2015

In the film noir “Double Indemnity” (Billy Wilder, director), Walter Neff describes the murder tale as “Kind of a crazy story with a crazy twist to it.”

****

OVERVIEW AND CONCLUSION

Over the last seven years, through the last stage of the bloody worldwide economic crisis and the ensuing often fitful recovery, through dramatic and sometimes violent swings in assorted financial playgrounds, America’s heroic Federal Reserve ferociously has pinned the Federal Funds rate to the ground.

Many marketplace clairvoyants believe this widely-beloved guardian relatively soon will cautiously begin prodding the Funds rate higher. The next Fed gatherings are 12/15-16/15, 1/26-27/16, and 3/15-16/16. Maybe the courageous Fed will lift the rate up 25 basis points in its December 2015 meeting! In any case, as the widely-watched United States government two year note resides near the Fed Funds rate from the yield curve perspective, the two year US Treasury level and trend in part reflect marketplace opinions regarding Fed policy shifts and inflation.

In any case, the recent elevations in the two year US Treasury note a few basis points over .90 percent probably will not be broken by much in the near future. There indeed are some signs that United States inflation has edged toward the Fed’s two percent target. The Fed also proclaims its desire to normalize its highly accommodative policy. Yet the Fed embraces a gradual approach and does not want to make any missteps. Also, the international economy (look at the Eurozone and China) has slowed. So the Fed probably will patiently assess the consequences of its rate move for the United States (and global) economy and marketplaces (such as the S+P 500 and the US dollar).

****

Yield levels and relationships obviously can fluctuate for all sorts of reasons. However, the falling rate trend for the US 10 year government note since early 2014 contrasts with the rising one for the UST two year note. The drop in 10 year UST yields, as it is occurring in the face of some US inflation and rising two year rates and artful Fed pillow talk about normalizing policy, arguably reflects economic weakness (mediocre GDP growth) in the US or elsewhere. In today’s interconnected world, feebleness elsewhere influences the American scene.

Note a related warning signal of actual or impending US economic weakness consistent with the fall in 10 year UST yields. Since the advent of money printing in the US in late 2008/early 2009, narrowing of the 10 year less two year spread roughly has coincided with the ending of that quantitative easing. This spread tightening (becoming less positive) in turn has reflected slower economic growth (or worries regarding potential weakness or recession). The agile Fed announced the actual first round of “tapering” (gradual ending of its latest QE venture) on 12/13/13, after several reductions in the QE program, tapering finished at end October 2014. The Treasury spread currently is close to its July 2012 depth.

Is a hunt for yield, fearful flight to quality, or need to own high-grade collateral more focused on the long end of the US government yield curve than the short end? Perhaps, but not necessarily. As the ECB extends its money printing program, is a shortage of long dated Eurozone government debt not only pushing yields there lower, but also thereby reducing yields for the UST long term instruments such as the 10 year? Perhaps. But economic weakness remains the most convincing reason for the sustained decline in UST 10 year yields since early 2014.

Consistent with the fall in the US 10 year yield and the narrowing of the 10 year versus two year yield spread, additional flags indicating weakness for the worldwide economy beckon. Although the S+P 500 remains high, emerging marketplace stocks in general and commodities continue to join hands in long-running substantial bear trends. The durable bull trend in the broad real trade-weighted dollar generally has danced in tune with the bear ones in emerging marketplace stocks and commodities.

FOLLOW THE LINK BELOW to download this article as a PDF file.
Two-Stepping- US Government Securities (12-1-15)

OF HUMAN BONDAGE- GOVERNMENT NOTE MARKETPLACES © Leo Haviland, April 9, 2012

Recent patterns in key government interest rate marketplaces warn that the worldwide economic crisis remains far from over.

Since around mid-March 2012, compare the trend of falling rates in government notes (10 year) of “flight to quality”/”safe haven” nations such as the USA, Germany, and Japan (and even the UK) with that of rising yields in several other European nations (not just Italy and Spain).

Note this rate pattern in government debt instruments alongside the recent high in the S+P 500 at 4/2/12 at 1422 as well as related weakness in commodities “in general”. See “The Worldwide Economic Growth Story: Chinese and Indian Stocks Alongside Commodities” (4/2/12).

FOLLOW THE LINK BELOW to download this market essay as a PDF file.
Of Human Bondage- Government Note Marketplaces (4-9-12)
Government Note Marketplaces (4-9-12) 

YIELD CURVES AND SPREADS- MAKING A DIFFERENCE © Leo Haviland, August 22, 2011

The 10 year versus two year spread on the United States government yield curve offers some insight into major economic and financial marketplace trends. US Treasury 10 year note spread relationships versus other instruments of similar maturity further confirm or signal major marketplace trends. The US of course is not the only nation with a yield curve, and America’s debt playground is not the only relevant one. America is not the only country with painful fiscal troubles. However, both the UST 10/2 yield curve differential and important 10 year UST note intermarket spreads underline recent trends in stock benchmarks such as the S+P 500 (and in commodities “in general”). They also warn of US (and worldwide) economic weakness ahead.

Across various parts of the yield curve, traders and other observers compare instruments of similar maturity. A popular time benchmark is 10 years. Given the variety of nations and marketplace sectors, potential quality comparisons are numerous. A survey of a handful underlines the ability of such spreads to shed light on economic conditions and various marketplace trends.

However, history is not destiny in spreads, including this German/US sovereign spread. Admittedly Treasuries offer some an apparent safe haven against the crumbling of parts of the international banking (financial) system. Yet with the US ten year yielding about two percent and current US inflation levels around that, and with the Fed determined to create inflation of around two percent, how eager will Chinese, Japanese, and other holders of US government debt be to keep being net buyers of it? We all know that shorter term UST yields are even less. What if foreigners become net sellers of Treasuries? Or, suppose the US dollar weakens sharply from current levels. What if this is not only on a broad real trade-weighted basis, but also against the Euro FX as well? What if America engages in another substantial round of money printing (or some other clever easing), and that the European Central Bank does not follow suit?

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

Yield Curves and Spreads- Making a Difference (8-22-11)

FURIOUS FINANCIAL FLUCTUATIONS © Leo Haviland, August 15, 2011

Burning passion for another is not the only love which makes us shake. When fear of losing substantial sums creeps up on numerous money lovers in intertwined financial playgrounds, both the players and their marketplaces can quiver violently.

Many pundits define a bear marketplace as a 20 percent slide from a noteworthy price top. Though the S+P 500 nosedived about 20 percent from its 5/2/11 high around 1371 to its 8/9/11 low near 1100, it then rallied sharply. On 8/9/11, the United States 10 year Treasury note touched yield lows of just over two percent. This matched the bottom achieved on 12/18/08 during the previous “flight to quality” panic in the (still-running) economic crisis that erupted in 2007. Given this equity and debt support, will things calm down much? No. The economic and political scenery has not sufficiently changed. Relationships within and between various financial arenas and their variables probably will vary to some extent as time passes, but the current entangled key financial factors will remain powerful, volatile, and intertwined. Although there will be occasional intermissions, turmoil in and between key equity, interest rate, currency, and commodity theaters therefore will not cease anytime soon.

Why place blind faith in the 2013 low rate policy, for the Fed confesses it changes its viewpoints? In addition, consider the Fed’s policy track record relative to its “original” expectations. Economic growth has been considerably lower than the Fed “had expected”. The Fed “now expects” a slower pace of recovery. Just as the Fed this month adjusted its policy by speaking of low Fed Funds through mid-2013, it eventually may alter its present course. Historians recall that the Fed’s quantitative easing floods likewise represented policy changes due to marketplace developments. Besides, how accurate were the Fed’s economic forecasts in 2007 and 2008, at the dawn and during the early stages of the acceleration of the economic crisis? So as Fed expectations change, so may its actions, whether on rates, quantitative easing, or otherwise.

FOLLOW THE LINK BELOW to download this market essay as a PDF file.

Furious Financial Fluctuations (8-15-11)