11 Feb A RELATIVELY QUIET DAY
Yesterday all markets were relatively subdued as fed speakers, Treasury auction and data had little impact.
Bloomberg observed yesterday the increase in Treasury yields is “Becoming a VaR Nightmare.” VaR or “value of risk” is a statistic that measures and quantifies the level of financial risk within the market for a period of time. It provides an estimate of loss that is expected to be exceeded at a given level of probability over specified time period.
Bloomberg writes the VaR from October through December was only worse in about 16% of the 191 quarters in data going back to 1973. The VaR has continued to rise during the first five weeks of 2021 and is currently at the point where the climb in yield will have a domino effect on other assets, specifically equities that are trading at an “unrealistic or unsustainable multiples.”
The newswire further opines rising rates can become a “viscous feedback loop” given current levels of concentrations and leverage, leverage which is amplified via options and derivatives.
Many times, I have commented about the huge increase in government spending. According to the CBO, spending in January jumped 35.2% while revenue increased just 3.3%, the result of recently passed stimulus. The CBO projects a 2020 budget gap of $3.1 trillion, the largest on record on both an absolute and relative basis as compared to the size of the economy.
The Administration has correctly noted in its argument for an additional $1.9 trillion stimulus package that interest payments on the debt actually shrunk in fiscal year 2020, the result of a plunge in borrowing costs. However, what would be the impact if rates started to rise?
I guess the correct question or concern is how steep of a rise.
What will happen today? Will the markets respond to several sentiment surveys and jobless claims?
Last night the foreign markets were quiet. London was up 0.06%, Paris up 0.01% and Frankfurt up 0.48%. China and Japan were closed for a holiday and Hang Seng up 0.45%.
The Dow should open quiet. The 10-year is unchanged at a 1.15% yield.