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.


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The oil driller Daniel Plainview declares in the 2007 movie, “There Will Be Blood” (Paul Thomas Anderson, director): “Ladies and gentlemen…Now, you have a great chance here, but bear in mind, you can lose it all if you’re not careful.” Perhaps Biblical passages inspired this film’s title. For example, see the Old Testament’s Book of Joel (2:30) and the New Testament’s Book of The Acts of the Apostles (2:19); note also the Book of Exodus (7:17-21).



The sustained rise in US Treasury yields and the ongoing fall in the broad real trade-weighted US dollar (including the UST and dollar’s intertwined breakthroughs of key points in January 2018) helped to lead (propel) the recent bloody slide in the S+P 500 and other stock marketplaces, including emerging ones. The S+P 500’s recent high, 1/26/18’s 2873, probably was a major top. For commodities “in general” (broad S&P GSCI), their January 2018 high is a very important top.

Memories of the 2007-09 global economic disaster surely influence many observers. Yet the 2018 economic (financial; debt) and political environments differ in key respects from those of 2007-09. Although fearful “flights to quality” may cause declines in UST yields from recent highs, the overall trend for the UST 10 year note yield probably remains upward. Amidst the carnage of the dreadful 2007-09 crisis, the broad real trade-weighted US dollar (“TWD”) rallied (from April 2008 to March 2009). The TWD may rally somewhat from January 2018’s 94.3 level. However, the TWD’s bear trend probably will resume, and the TWD likely will fall beneath 94.3.


The Federal Reserve and other central banks might offer soothing rhetoric if wounds to financial (interest rate and stock) players were widespread and substantial. Yet as the Federal Reserve is normalizing its balance sheet, that potential rescuer currently is much less likely than it was during the QE money printing era (including the taper tantrum events) to charge into battle and start purchasing UST. The current bloated Fed balance sheet argues that the Fed “has fired off a great many of its bullets already”. The US monetary policy scene is different from the 2007-09 disaster and its aftermath. And most economic growth forecasts remain fairly optimistic. Why would the Fed scramble to renew a highly accommodative monetary stance when inflation apparently is moving toward its beloved two percent goal? In addition, the Fed probably believes that the current and prospective US federal fiscal stance is very stimulative.

Therefore a ten percent fall in the S+P 500 probably does not trouble the Fed and its central banking comrades much nowadays. However, the Fed probably would rapidly roll out propaganda to support (“talk up”) stocks and generally boost consumer and business confidence if the S+P 500 nosedive looked likely to approach twenty percent (many experts define a bear marketplace in stocks as one of twenty percent or more).

Yet apart from rhetoric, would the Federal Reserve revisit its arsenal of weapons and resume quantitative easing (buy and hold UST), or at least slow down or stop the current program of reducing the size of its huge balance sheet, because of a brutal and shocking stock decline? A modest bloodbath (roughly ten percent drop from the top) in equities alone would not ignite Fed action (and related policy responses by its comrades) on the money printing front (or inspire the Fed to slow or halt its balance sheet reduction scheme). Arguably it will take a fall of about twenty percent (and perhaps more) in the S+P 500 (alongside similar equity declines around the globe) in conjunction with growing and substantial fears of a sharp reduction in US and international economic growth (GDP) rates. Nevertheless, despite the widespread faith of many marketplace generals and their troops in the wisdom and power of central banks (especially the Fed) as well as the evidence of much of the past several years, dramatic Fed rescue action does not inevitably guarantee sustained significant US stock marketplace rallies.

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There Will Be Blood- Financial Battlefields (2-9-18)


Given the proximity of the Federal Funds rate to the short end of the government yield curve, the Fed generally has more ability to manipulate (strongly influence) yields for Treasury Bills and short term notes than instruments such as the UST 10 year note and 30 year bond. The two year UST note generally receives much less media attention than longer duration government debt. Even most interest rate insiders these days concentrate much more on the long end of the curve than on the two year. However, financial heralds also should focus on short term American interest rate yield levels and trends, because in the current marketplace landscape, signs of bottoming and rising rates in this important segment of the UST yield curve confirm the higher yield trend in the 10 year UST and other long-dated securities.

After the UST two year reached a major low near the ground at .14pc on 9/20/11, it reaffirmed this depth with subsequent lows at .19pc on 7/23/12 and 5/3/13. The UST two year note thereby established a major bottom alongside that in the 10 year note. Admittedly the two year yield has not spiraled upward as dramatically as the 10 year’s, for the Fed conductor has not relaxed its tight grip on the Fed Funds rate baton. This relative quiet in and the low absolute level in the two year tend to create faith in and complacency regarding the Fed’s powers and the effectiveness of its methods. Very low short term government rates and promises to continue them arguably encouraged some complacency, not merely happy enthusiasm, in equity halls such as the S+P 500 as well. The S+P 500 was all jazzed up through much of calendar 2013, attaining its recent high around 1710 on 8/2/13. Yet this intertwined yield low and rising rate pattern at both ends of the government yield curve warns of weakness in the Fed’s near term ability or willingness (or both) to keep repressing short term yields to very low levels.

The bear move of higher US interest rates probably will continue, even if that venture is jagged and perhaps occasionally interrupted by forceful Fed action (or wordplay) or flight to quality fears. Marketplace history is not marketplace destiny. But in the current context, historical review suggests that a sustained substantial climb in US government interest rates such as the one currently underway probably will encourage a decline in the S+P 500. After all, sustained yield declines in US government rates helped to rally American stocks, so might sustained yield rallies help to reverse some of that equity bull charge?

Increasing government interest rates do not always indicate economic strength or point to (confirm) rallies in stock marketplaces. Recall the rather recent big-time crisis on the so-called “European periphery” that captured the limelight, as well as the experiences of many emerging marketplaces.

Anyway, increasing United States government interest rates are not always (necessarily) a sign of American economic recovery and strength, or of a bull move in stock benchmarks such as the S+P 500. The extent to and reasons why which UST rate levels and trends coincide (converge) with or lead (lag) those of those in the S+P 500 are matters of opinion. In any event, review the following table, which covers the past 25 years or so. Putting several substantial moves in the UST two year note in a spotlight alongside those in the S+P 500 indicate that sustained significant ascents in UST rates often eventually link to notable peaks in the US stock marketplace. The tops in yields are “roughly around the same time” as bull highs in US equities. UST 10 year moves are consistent with this perspective as well.
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In professional sports such as baseball and Wall Street’s competitive marketplaces, history is not destiny. However, “the past” and variables apparently relevant to it need not be discarded as being of little or no importance, relevance, or guidance for current and future playgrounds. During the worldwide economic crisis that dawned in mid-2007 and the ensuing recovery, noteworthy moves in the 10 year less two year United States government yield spread often have roughly coincided with significant Federal Reserve Board policy decisions (and several months ago with major European Central Bank ones). These US Treasury yield curve ventures (trend changes) generally have occurred around the same time as significant moves in the US Treasury 10 year note and the US stock marketplace (S+P 500). Many lows in the 10/2 UST yield curve spread have tied up with (occurred within a few months of) important S+P 500 bottoms; pinnacles in the spread likewise link up somewhat closely in time with plateaus in the US stock playground.

The UST 10 year less two year spread probably established a major bottom on 7/24/12 at 117 basis points (10 year yield higher than two year return, so a positive yield curve; short rates over long rates creates a negative yield curve).

What would a further notable widening of the spread (steepening of the curve, more positive slope) from current heights around 165 basis points suggest to avid financial marketplace fans? Perhaps a sustained move in this 10/2 UST spread over around 200 to 210 basis points will indicate a renewed (further) strengthening of the US (and worldwide) economic recovery.

However, that upward path over 200/210 basis points instead may warn of impending economic weakness. This viewpoint is not necessarily as off base as some may claim. One needs to focus on whether America is a key source of and significant spark for likely global (not just US) feebleness.

In that regard, recall the shift from 6/12/08’s 117 basis point low (same as 7/24/12’s) up to 11/13/ 08’s 262bp as the financial crisis raced forward (Lehman Brothers bankruptcy 9/15/08). The US housing and financial leverage (banking system) problems were critical issues (though of course not confined to the US), even though the US (and the world in general) did not in mid-2008 yet face major fiscal troubles.

Why might the 10/2 UST spread widen (as in mid-June to mid-November 2008) nowadays or in the near or medium term? In some circumstances, there can be a dismal widening of the UST spread (and higher long term rates) accompanied by little or no economic growth (or even a recession). Suppose the current US (and international) economic horizon darkened significantly. Assume a big fiscal difficulty in the US is a major factor in this bleak outlook. Then maybe this time around, when economic downturn risks in general still loom large, there will not be as nearly as substantial a flight to quality into UST as there was at end 2008 (after mid-November) and as there has been at subsequent economic (downturn) crisis periods since then up to the present time. Thus this setup probably would produce an outcome for the 10/2 yield spread very unlike its pattern during the previous substantial financial deteriorations of the mid-November 2008 to the present time span. Many players (especially international ones) may not view the UST as wonderful quality (especially when nominal yields are so mediocre) if the US may or does become the star of a fearsome fiscal problem and related systemic economic crisis.

Yet the history of the past several years also warns that a slump in the 10/2 UST spread back close to around the July 2012 bottom probably signals US (and global) economic weakness as well.
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Throwing Curves- the Friendly Fed’s Yield Curve Game (3-5-13)
US Treasury 10 Year versus 2 Year Note Chart (3-5-13)