DAVID WOO: There's Only One Market In The World That Really Matters Anymore

Anyone who has been following global financial markets over the past month or so will have easily flagged the sell-off in the U.S. Treasury market as a major event that has been felt around the world.

Even more important than the price action in Treasuries itself, though, is how volatility in the market has risen.

The chart below shows the percentage increase in both Treasury yields and volatility of Treasury yields since the beginning of May, when the big sell-off in the bond market began.

Since May 2, yields have risen 34%, while volatility is up 64%.

Business Insider/Matthew Boesler, data from Bloomberg

"Everybody knows that at any given moment in time, there is usually one market more important than all the others – the one that sometimes becomes the principal driver of all other markets," writes BofA Merrill Lynch rates guru David Woo in his latest note to clients. "Price action over the past month tells us that US rates, especially US rates vol, has become that pivotal market."

Why has the Treasury volatility market become so important?

Woo argues that "carry trades love low risk-free interest rates, but they love low interest rate volatility even more."

"This is why over the past three years, billions of dollars have poured into high yielding assets like risky corporate bonds, emerging market currencies, and dividend paying stocks, driving their risk premiums to abnormally low levels," writes Woo. "This is also why with the back-up in rates vol triggered by talks about the tapering of QE, these assets have witnessed a sizeable correction over the past month."

According to Woo, there are three reasons interest rate volatility could be set to move higher in the Treasury market:

Despite the recent spike in rates vol, it remains at a low level. Both our macro-vol model and our walk-vol model suggest that 10y rates vol is undervalued. The breakevens on rates straddles also seem too narrow - the implied range for a 3m 10y rates straddle is 1.8-2.3%.

Increased positioning in US rates could push rates vol higher. Investors have built up considerable long positions in both the US dollar and US equities, reflecting growing optimism about the US. In contrast, positioning in US rates appears unusually light. It seems reasonable to assume that rates positioning has room to play catch-up, if only for hedging purposes. Increased demand for convexity hedging can also push US rates vol higher. We believe many mortgage investors are under-hedged.

We don't see the May NFP significantly changing the tapering speculation. The modest increase in the unemployment rate may lead the market to push out a little further the start of the Fed rate hiking cycle, but the healthy pace of job creation does not weaken the case for tapering, in our view. We have been surprised and impressed by the resilience of the US recovery to both fiscal tightening at home and the slowdown abroad. In any event, we suspect the rates outlook has become more asymmetric: rates will likely react more to strong data than to weak ones, at least in the short-term.

10-year U.S. Treasury yields continue to rise today. Right now, they're up about 3 basis points, trading at 2.20%.

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Veteran Advisor Reveals Investment Rules He Learned From His Father

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Veteran Advisor Reveals 8 Great Investment Rules He Learned From A Non-Professional Investor (Advisor Perspectives)

Rob Isbitts of Sungarden Investment Research, who was named one of the top U.S. wealth advisors four times by Worth magazine, said he got some of his best investment advice from his father, a non-professional investor. Those are "ingrained" in his firm's investment process.

1. "Never buy a security unless you believe the reward to risk ratio is at least 2:1 in your favor." 2. Don't waste too much time on predictions. 3. Stock will almost always fall faster than they rallied. 4. Have a target sale price and be ready to sell at or near your target. Also be open to changing your target when conditions change. 5. Don't follow the rabble. 6.   "In a bull market, even if you sell prematurely, another opportunity will arise elsewhere. Falling in love is for mating, not investments." 7. In a bear market be very flexible. 8. Keep your emotions in check when you're investing.

BlackRock Is Giving Equity Managers The Boot (Pensions & Investments)

BlackRock has replaced portfolio managers on 80% of its equity teams in the past year and a half, according to Pensions & Investments. And this has extended to research analysts as well with entire teams being laid off. BlackRock saw $20.5 billion in net outflows from its active equity portfolios in the year through March 31. Active equity accounts for a smaller part of its AUM but a significant portion of revenue.

Last Month Was Very Bad For Low Volatility Strategies (Falkenblog)

Many researchers are questioning low volatility strategies after their underperformance relative to high beta strategies.

Falkenblog

Detroit-Based Advisor Agrees To Settle Charges That It Stole From A Pension Fund For The City's Police And Firefighters (SEC)

Chauncey Mayfield and his MayfieldGentry Realty Advisors will pay back almost $3.1 million that was allegedly stolen from a pension fund it managed for Detroit's police and firefighters, according to the SEC. 

From the SEC: "He used it to purchase the shopping properties and title them in the name of a MayfieldGentry affiliate. Other executives at MayfieldGentry gradually became aware that Mayfield had siphoned money away from their biggest client. Rather than come clean about the theft and risk losing the sizeable business the firm received from the pension fund, MayfieldGentry officials instead devised a plan to secretly repay the pension fund by cutting costs at the firm and selling the strip malls. Their plan ultimately failed when MayfieldGentry could not raise enough capital to put the stolen amount back into the pension fund."

BYRON WIEN: I Spoke To The Smartest Man In Europe, And He's Sounding Really Bullish (Blackstone)

Blackstone Vice Chairman Byron Wien has a source he calls "the smartest man in Europe." That man now sounds bullish according to Wien. Here's a highlight from their conversation paraphrased by Wien.

"Money managers had been so preoccupied with that idea that they failed to recognize the pullback from austerity which could lead to the restoration of growth.  During the last few years European companies, like their American counterparts, have become vastly more efficient.  ...Stocks are priced assuming conditions will get worse and I see them getting better – not everywhere and not in every sector, but if you are a careful stock picker you can make money.

"The most important factor is that almost no investor likes Europe now and that enhances the opportunity.  Two years ago everyone was worried that the European Union was going to break apart.  That was never going to happen over the near term because everyone had too much to lose, especially Germany, which has been the biggest beneficiary.  Now most people realize Europe is going to muddle through at least for a while, but few people are buying European stocks to take advantage of this conclusion."

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Housing’s Hot, but Lumber’s Not

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This Is Increasingly Looking Like An Emerging Market Bond Meltdown

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The massive sell-off across emerging markets continues in force today.

One of the big themes in global markets over the past month has been the rise in U.S. Treasury yields and the attendant strength in the U.S. dollar. This has caused a big unwind in emerging markets, as EM currencies depreciate against the dollar and higher-yielding EM government bonds look less attractive relative to Treasuries.

The 10-year Turkish government bond yield rose 22 basis points today to 4.22%. In South Africa, 10-year yields rose 28 basis points to 7.84%. And in Mexico, 10-year government bond yields widened 5 basis points to 3.33%.

Business Insider/Matthew Boesler, data from Bloomberg

And if you're looking for a really ugly chart, inflation linkers in Brazil are getting absolutely massacred. (Inflation linkers are just bonds linked to inflation, like TIPS in the U.S.)

Business Insider/Matthew Boesler, data from Bloomberg

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ANALYST: We Are Seeing A Farm Bubble In The Corn Belt

National farm values appear to be overpriced but not in a bubble, according to Paul Ashworth at Capital Economics.

Prices are up 10% in the last year, and have been up 25% over the past three years.

But he does see a "localized bubble in farmland values in the corn belt," considering the biggest gains in farmland values have been among the largest corn and wheat producers:

"Near-zero interest rates have undoubtedly played some role in this, but the bigger factor has been the surge in corn and wheat prices over the past decade. 

"We do not believe that a bursting of this bubble would have any systemic risks for the wider financial system. Nevertheless, a slump in farmland prices in the corn belt could hit some small community banks very hard and it would be devastating for the farmers involved."

Prices have risen by over 50% in prices in the northern plains (Kansas, Nebraska, North and South Dakota) and the corn belt (Illinois, Indiana, Iowa, Missouri and Ohio). In Nebraska prices have nearly doubled over the past three years and Iowa prices are up over 80%.

The rising price of corn and wheat explain the rise in prime crop land values. But ranch prices haven't moved along with livestock prices, and this is because livestock prices were pushed up by rising feed costs. Ashworth also points out that farmland values could be driven by the shale revolution.

Capital Economics

A closer look at Iowa

Iowa's farmland is overvalued relative to national value of farm production, writes Ashworth.

That ratio is almost double the long-run average suggesting that farmland is overvalued by as much as 100%. But this isn't an apples to apples comparison. From Aswhorth:

"Comparing Iowa farmland with the national value of farm production is, however, unfair. Unfortunately, we don't have figures for Iowa State     farm production values. But since Iowa farmland is predominantly used to grow corn, we can compare it to corn prices, although we need to adjust for rising yields. (We used a 10-year average of corn yields to smooth out temporary drought-related slumps.) This ratio suggests that Iowa farmland is a more modest 40% overvalued.

"Even then, however, we have used the 2012 end-year price of around $6.50 per bushel. Corn is now fetching around $5.50 per bushel, which would suggest that Iowa farmland is nearer to 70% overvalued. The bottom line is that Iowa farmland is markedly overvalued, unless you believe that corn prices will rebound back to recent highs.

"Compared with cash rents for farmland, however, Iowa farmland values don't look nearly as overvalued. Data from Iowa State University show that cash rents for Iowa farmland surged to $252 per acre in 2012, up from $183 in 2009. Using those cash rent rates and farmland values, we can calculate a yield for Iowa farmland. As Chart 12 shows, that yield has fallen from about 6% a decade ago to 3% in 2012. Given the even bigger decline in long-term Treasury yields over that time period, the decline in Iowa farmland yields seems reasonable."

The good news is that the demand for farmland loans is decreasing, and only 0.7% of farmland loans are seriously delinquent. And though a collapse in farmland value would hurt small community banks, these loans don't make up a huge part of banks' balance sheets and therefore don't post a systemic risk to the financial system."

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The Day Joe Granville Crashed The Market [Video]

In the course of my research for a project I have in the works, I came across this amazing little nugget of archival footage.

The below clip is a business broadcast from the CBC circa January 1981. It chronicles the day after legendary newsletter nutcase Joe Granville single handedly caused a stock market panic. I love everything about this clip, especially the clothes and haircuts and computers they're all using. And Granville himself makes an appearance, he's f***ing awesome.

This is amazing...

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