52.2 Taper Tantrum II: Yield Curve Twists, Badly?
The US yield curve has twisted as Bill yields fall and Bond yields rise. We review a similar situation in 2013 popularly known as “the Taper Tantrum”, WHICH WAS NOT A TAPER TANTRUM! Then – like now – a collateral scramble in Bills and a relief sell-off in Bonds.

[Emil’s Summary] The theme of Making Sense Episode 52 is how an environment reacts to an anomaly. Resilient systems keep these aberrations constrained. But fragile ones can retroactively redefine what had earlier been labeled as an “irregularity”, “oddity” or “operational error” to something altogether more unsettling: “cause”, “spark”, “trigger”.

In part one Jeff Snider continues his multi-week review of breaks to the smooth functioning of interbank payment and messaging systems. This time a look at a sequence that led to a week-long disorder to Fedwire in August 1990.  Part two, also a continuation of a multi-week review, ponders what may be causing the disquieting twist in the US Treasury yield curve. Is the demand for short-term collateral a disqualification of reflation, as was the case during 2013’s so-called Taper Tantrum?  Lastly, some words on oil and the developing Texas power market credit crisis, in which electric retailers failed to make $2.1 billion in required payments and put the largest power generation and transmission cooperative in Texas into bankruptcy.

Fedwire “operational error[s]”. Unsettling demand for Bills. Texas margin calls. An approaching quarter-end seasonal low point in liquidity. A looming regulation-mandated US Treasury cliff on April Fools’ Day.  All anomalies… in a resilient system.

———WHO———

Twitter: https://twitter.com/JeffSnider_AIP
Twitter: https://twitter.com/EmilKalinowski
Art: https://davidparkins.com/

Jeff Snider, Head of Global Investment Research for Alhambra Investments with Emil Kalinowski, Ferberized.  Art by Winterfell resident, David Parkins. Podcast intro/outro is “Some Thing” by Rambutan at Epidemic Sound.

———WHERE———

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———WHEN———

00:05 The Financial Times suggests the Fed ignore petulant “taper tantrum” bond market cries
01:31 There was no “taper tantrum”, furthermore we want interest rates to rise!
04:03 The yield curve is twisting, the spread is widening. What does that mean? Is it good? Bad?
07:54 What happened in 2013 in the mortgage backed security markets?
09:39 What happens if MBS creators are unable to deliver on the promised volume of securities?
12:31 Rising mortgage rates would not shock the MBS market in a healthy, growing economy
13:30 Inability to deliver on MBS promises generated a run on short-term US Treasury Bills
15:37 What does it mean when US Treasury Bonds are selling off? Recovery? Or just a Reflation?

———WHAT———

Fed needs to ignore ‘taper tantrums’ and let longer rates rise: https://on.ft.com/2O5ECMm
What Might Be In *Another* Market-based Yield Curve Twist?: https://bit.ly/2ZVz4qE
Alhambra Investments Blog: https://bit.ly/2VIC2wW
RealClear Markets Essays: https://bit.ly/38tL5a7