Rising Bond Yields.

This Is Just the Start

Published: Tuesday, 8 Jan 2013 | 10:50 PM ET By: Dhara Ranasinghe

Brighter economic prospects, diminishing fears about a U.S. fiscal crisis and the idea that the beginning of the end is in sight for a period of ultra-easy monetary policy have sent government bond yields racing higher at the start of the year. Indeed, faced with this backdrop, it appears that bond yields, low for so long, finally look like they are heading higher, analysts say. A sell-off in bonds has pushed yields on 10-year Treasuries up more than 15 basis points since the start of January to about 1.87 percent. They are about half a percent above record lows hit last July when concerns about the euro zone debt crisis sent investors scurrying into safe-haven debt. "We may see a fairly significant move in the 10-year yield and I think it could go up to as high as 3 percent in the next 12-18 months," Mike Crofton, President and CEO at Philadelphia Trust Company told CNBC, adding that money is now starting to move out of bonds and into stocks. Yields on benchmark Treasurys have fallen some 200 basis points in the past five years as investors overlooked U.S. fiscal woes and hefty debt issuance to snap up safe-haven bonds in the face of a weak economic growth and volatile stock markets. Even as many analysts predicted a bursting of the bond market "bubble" last year, yields continued to decline amid risk aversion. (Read More: Predictions That Went Wrong in 2012) But the sell-off seen in the early days of 2013 may be a taste of more to come, analysts say. "Treasury yields are something that I am paying more attention to, with yields on 10-year Treasurys really close to the psychologically important 2-percent mark," David Rodriguez, Quantitative Strategist at Daily FX in New York told CNBC Asia's "Squawk Box."

"And with all the mess going on in Washington, there is a real risk that bond investors are losing patience with Treasurys given the fact that U.S. has massive deficits," he said. The United States must do more than the recently passed "fiscal cliff" measures if the country is to rescue its triple-A debt rating from its current negative outlook, rating agency Moody's Investors Service warned last week. Who Needs a Safe Haven? In a sign that risk appetite, to the detriment of the safe-bond market, is coming back in force, the VIX index, a popular gauge of fear in the equity markets plunged almost 40 percent last week. (Read More: Why VIX's Recent Plunge May Be Bad for Stocks) Kathy Lien, managing director at BK Asset Management in New York, says that the fall in the VIX index and spike in bond yields are the two most interesting developments in financial markets at the start of the New Year. "The increase in yields and decline in Treasury prices reflects worries that the Federal Reserve could end asset purchases in 2013. The "fiscal cliff" deal also removed some risk in the market, encouraging investors to dive back into riskier assets," she said in a research note. Markets are starting to ponder whether the Fed will end its bond purchase program before the end of the year, after minutes from the Fed's December meeting released last week showed growing unease on continuing the buybacks. (Read More: As Risk Appetite Returns, What Next for Treasurys?) But with the economic recovery still in its early stages, unemployment still high and inflation contained, financial markets are not expecting the Fed to tighten monetary policy anytime soon. And that means a collapse in the bond market is unlikely, analyst said.

Edward Perks, Portfolio Manager, Franklin Income Fund discusses the risks of having exposure to fixed income. "It is certainly possible, but it is not our call," said Edward Perks, portfolio manager at Franklin Income Fund in California, when asked on "Squawk Box" about the potential for a collapse in the bond market this year. Data over recent months has painted a brighter picture of the U.S. economy, with the latest jobs numbers showing 155,000 new jobs were added in December, continuing a trend of slow improvement. "The main reason for rising yields is that Treasurys' role as a safe-haven asset is declining and the economy is moving inexorably towards the first rate hike," David Keeble, global head of interest rate strategy at Credit Agricole said in a note. "Not only do we believe that the low point in Treasury yields has been hit but also that implied and actual volatilities will begin to ascend," he added.

Why Oil Prices Could Slide

Published: Friday, 28 Dec 2012 | 11:01 AM ET By: Rich Ilczyszyn

WTI has rallied in the face of a stronger dollar and weaker equities. Although the dollar is up 0.19 percent and the equities are down 0.62 percent Friday morning, U.S. crude oil has held up around $91. Thursday night we reached new swing highs up to $91.50. Government inventory data will be released on Friday and the American Petroleum numbers showed a much larger build in gasoline than expected. I will be watching gasoline data very closely, as demand has risen a bit, which could provide support for oil prices.

But what's really going on in WTI is a short-covering rally, as we have a year-end closure of positions. Most big traders I have spoken with simply want out of the market so they can cut risk. It is the largest and most liquid market in the world, but how can futures work for you? Learn how to harness the power of this exciting and fast-growing market. For the last few years, energy prices have done well out of the gate in the first quarter. However, pressured equities will keep crude under pressure as well, so pay attention to the S&P 500 bias. For example, a close below 1400 could be bearish for oil, as most professional oil trades use the equities as an indicator. I will watching the Commodities Futures Trading Commission's Commitments of Traders report Friday night. This is the weekly report that lets us know how traders are positioning themselves. Meanwhile, here's my day trade for Friday: sell February Mini Crude at $91.83, with a dollar stop at $92.83, and profit target at $89.83. If this order is not filled Friday, it expires. This trade risks $500 to make a potential $1000. Good luck and good trading.

Why Euro Zone Crisis May Get Worse This Year

Published: Monday, 7 Jan 2013 | 2:29 AM ET
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It would be fair to say that U.S. hedge-fund manager Kyle Bass does not expect the explosion in global debt in recent years to turn out well. "This ends through war," Bass, the founder of Hayman Capital Management in Dallas, said. "I don't know who's going to fight who,but I'm fairly certain that in the next few years you will see wars erupt, and notjust small ones," he told a recent conference.

But while many investors have, like Bass, bet heavily on chaotic sovereign default in countries such as Greece, three years of dogged diplomacy in Europe have so far wrongfooted the doomsayers. And while some popular protests have erupted into violence, notably in Greece, the mystery for many analysts is why Europeans have not fought harder against escalating job losses, social spending cuts and tax rises. Unemployment in Greece and Spain has reached 25 percent. Bass bases his apocalyptic view on his calculation that credit market debt has reached 340 percent of global output, saying the worldhas never lived in peacetime with such a burden. He says some societies will not withstand the social strain when trillions of dollars of debt have to be restructured, inflicting hefty losses on millions of investors. War in the euro zone - which Bass does not expect to survive in its present form, if at all looks far-fetched, to put it mildly. Europe's political elite demonstrated in 2012 its determination to preserve the euro. Prophecies that doom has merely been delayed could well prove yet again to be wide of the mark. But it is reasonable to ask how much those caught in the cross-fire between creditors and debtors will stand for as the euro's battle for survival drags on. Take Portugal, now into the third year of recession, where the president has asked the Constitutional Court to rule on the legality of unprecedented tax increases. Adelino Maltez, a political scientist at Lisbon Technical University, said Portugal "got drunk on Europe" during the boom years. "Now for the first time we have the feeling that we have nowhere to go," he said. "For 2013 the Portuguese lack a sense of mission. There is a recognition of collective powerlessness."

In other words, with scant prospect of a swift return to growth, the risk in 2013 is less outright conflagration in the single-currency area than a fraying of social and political ties and an insidious erosion of hope.

Watch Greece and Spain

Jean-Dominique Giuliani, who heads the Robert Schuman Foundation, a pro-European think tank in Paris, says difficult reforms must continue because the crisis shows no sign of going away. "Changes will now be constant and will demand a great deal of populations, overturn societies, surprise political leaders and unsettle experts," he said in a commentary on his group's web site. Charles Robertson, chief economist at Renaissance Capital in London, is among those wondering how much more voters are prepared to sacrifice. He expects Greece to quit the euro this year and says Spain might follow by the end of 2014. Spain has already endured one year of unemployment above 25 percent but will probably have to manage three more in order to meet the financial targets set by its international creditors. "No economy (as far as we are aware) has ever sustained this unemployment rate and maintained a peg to a fixed exchange rate,"Robertson said in a report. Most damaging of all, he said, was the absence of hope: "For households, wages are still likely to fall to boost competitiveness.Households are deleveraging and defaulting, not borrowing more to fuel consumption." A vibrant black market and a still-generous welfare state mean unemployment is probably sustainable at higher levels, and for longer,than ever before, Robertson acknowledged. Still, by 2014, Spanish voters will have had time to conclude that the reforms introduced by Prime Minister Mariano Rajoy, whom they elected in 2011, have failed to deliver prosperity. "People may then take to the streets and demand change," Robertson argued.

Slowly Corroding

Even though the consensus has swung towards the euro staying intact, many economists fret about the broader ramifications of protracted austerity. A possible explanation suggested by Deutsche Bank for Europe's relative social peace to date is that the burden of adjustment has fallen disproportionately on young people. In Spain, for example, the employment rate for the under-25s tumbled from 39.1 percent in mid-2007 to 18.3 percent in mid-2012, a fall of 20.8 percentage points. For the 35-49 age group, with a higher level of protection against layoffs, the drop over the same period was 8.9 percentage points. This mix of "youth sacrifice" and relative economic security for the bulk of the population might be why street protests have failed -except in Greece - to translate into a big shift in votes for radical parties,according to Gilles Moec, a Deutsche economist. But the potential economic cost is huge. With fewer youngsters working, Italy and Spain have suffered a loss in productivity of about 2 percent, boding ill for future growth, Moec estimated. The textbook answer is to push policies that end the divide between hard-to-fire 'insiders' and typically young 'outsiders' on precarious short-term contracts. The risk, however, is that these and other structural reforms become discredited because voters associate them with declining living standards and rising inequality, according to Simon Tilford, chief economist at the Centre for European Reform, a London think tank. "The consequences are likely to be far-reaching. Not only will governments struggle to push through the needed reforms, but there is a risk of a broader backlash against the market economy and the European Union," he said.