Picking rising yields on US treasuries is saying we are in an inflationary environment.....we aren't, the word is deflation!
Yields on US treasuries *were* rising in March. Quite sharply in fact.
Also, if you look at the performance of TIPS you will see that the market expectation is for rising inflation.
I think people have noticed that the US reserve bank has got itself into a position where it cannot afford to sell enough securities on its balance sheet (i.e. reverse QE and Twist) to soak up the monetary base in an orderly fashion as yields rise. It will become technically insolvent if it tries. Essentially the Fed is 52:1 leveraged, the average duration of the treasuries ($1.5Trillion) it holds is about 5 years, which means they will lose about 5% of value per 100 BP of interest rate increase at the current point, so unwinding the current position *without* allowing inflation to raise nominal GDP will wipe out their assets. A rise in US inflation is pretty-much baked into the exit from the current situation.
Yields on long-duration treasury debt will go off like a bottle rocket quite a long time before the fed raises interest rates. You will probably need to get out more than a year before ZIRP comes to an end. That's what we were seeing in march - people getting out because the Fed was getting hawkish. But in May, fear has come back on and people are piling into treasuries again, so I had at least a few months more I could have held those securities. So as it turns out, I took my gains early and missed another 8% to date (2% in the last couple of days!). Doesn't stop long-duration US treasuries from being a highly risky asset at the moment - but possibly still less risky than shares.
You don't need inflation to raise the yelds. All you need is *expectation* of inflation. The expectation is already there, but fear of other asset classes is holding them low (and pushing them lower) at the moment. The way I see it, the fear will be resolved by a large correction in share prices followed by a massive move out of treasuries and into shares followed by a period in which the fed is forced to miss its inflation targets.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
The New Fear Gauge: Treasury Yield After denial, anger, bargaining and depression, investors seem ready to enter the final stage of grief over low yields: acceptance.
With the situation in Europe worsening, investors' attitude toward record-low Treasury yields is quickly moving to a realization that, as low as they are, yields on Uncle Sam's bonds could fall further.
"The market is coming around to the point of view that if rates go lower, that just means they can go even lower from there," said Ajay Rajadhyaksha, global head of rates and securitized research at Barclays PLC in New York. Yields on the 10-year Treasury note plumbed record lows on Thursday, dropping to 1.580% as investors rushed for the safety of government debt. As Treasury prices rise, yields decline.
Barclays analysts expect yields to rise to 2% by the end of this year. But they stress that investors shouldn't try to fight the current momentum pushing yields lower until more clarity on Europe emerges.
Interest rates have continued to grind lower in recent years amid a global effort by central banks to keep rates low to stimulate their economies and encourage lending. But the prospect of slowing global growth, and demand from investors for safe assets, has pushed rates progressively lower. While straining income-dependent investors, such as pension funds, the decline in yields has generated sizable price gains for holders of Treasury bonds. Since the end of 2007, Treasurys with a maturity of 10 years or more have returned 61%, according to Barclays index data, compared with a 1.4% decline in the Standard & Poor's 500-stock index, including dividend payments.
And for investors looking for safety, there are few appealing alternatives. Global investors don't need to look far for examples of interest rates that have fallen below the record-low yields offered by Treasurys. In some ways, that makes even the paltry yield on Treasurys seem relatively attractive.
Yields on bonds issued by countries still seen as safe have collapsed in recent days as the European crisis entered a new phase centering on Spain.
Yields on 10-year German bonds, known as bunds, tumbled to a record low of 1.207% on Thursday. British gilts fell to 1.562%. Switzerland, Denmark, Sweden, Finland and Japan also sport yields below the U.S. on 10-year notes.
While driven by short-term panic, yield levels this low also are signaling investor concern about the long-term health of the European and global economies. The yield on the German 30-year bond on Thursday fell below that of Japan, a nation that has been locked in a more than decadelong struggle to boost economic growth and fight off falling prices.
"It's telling you that there's fear of the events in Europe resulting in a deflationary outcome," said Jeffrey Rosenberg, chief investment strategist for fixed income at asset manager BlackRock Inc. in New York.
The yield on two-year German notes briefly turned negative Thursday, joining the Denmark two-year in negative territory.
Negative yields mean that lenders effectively pay borrowers to take their money. Such situations usually emerge only during times of extreme investor fear, when focus turns from making money to merely preserving cash. That means low yield levels won't necessarily deter investors from buying Treasurys and other safe assets, pushing yields lower still.
Yields on U.S. two-year notes, at 0.266%, show few signs of going negative soon. But market observers are now talking about previously unthinkably low levels of 10-year yields as within the realm of possibility.
Analysts at Bank of America Merrill Lynch and BNP Paribas Securities Corp. suggest that 10-year yields could test 1.30% if the situation in Europe gets worse and if Greece makes an exit from the euro zone. Strategists at Credit Suisse Group AG say there is no reason rates couldn't trade in the 1.2%-to-1.3% range.
"Yield doesn't matter; it's about principle and the return of it," said John Briggs, U.S. interest-rate strategist at RBS.
Mortgage rates followed long-term bond yields to record lows Thursday, with the average 30-year mortgage rate dropping to 3.75% in the week ended Thursday, according to Freddie Mac.
Ironically, it is investors that embraced low yields that have enjoyed some of the best returns available in the financial markets. That is because yields represent only one component of the returns that bond investors collect. Price increases generate the rest. And because of the unique characteristics of bond investing, when overall yield levels are low, relatively small changes in interest rates can generate large changes in price.
The result? Solid gains for long-term Treasury bonds.Long-term Treasurys have produced a return of 4.9% this year through Wednesday, according to Barclays index data, returning 6.7% in May alone. By comparison, the S&P 500, including dividends, returned a negative 5.8% in May, although returned 5.4% for the year.
Yields on US treasuries *were* rising in March. Quite sharply in fact.
That's supposing that fiat money and its bonds has a real connect to market reality the same way gold money did.
But no.....the FED can lower interest rates infinitely if it wants to!
You can half a 1% interest rate and the bonds almost double in value.......0.5%.......0.25%......0.125%...and you can go on forever as per Zeno's theorem.
He alerted me to the fact that it is a huge error to conclude fiat money always means inflation....in fact fiat money can turn as severely deflationary as it can be inflationary. It has to be remembered that money is only a proxy for real market activity and abusing the monetary standard will only lead to its destruction.
That's why in my former incarnation as Wulfie I've been warning about deflation since the beginning of 2007. There is one way out, burn the FED down and destroy the USD!!!
Postby wulfgar » Sun Mar 25, 2007 3:48 pm It appears we are on the verge of the greatest deflation in world history. So far in this decade world liquidity has been on an inflationary bent. The mechanics of this are quite simple. Prior, the greenback was the only world reserve currency. Then the Euro showed, the first currency large enough to challenge the greenback since the demise of the pound sterling as world reserve in the 1920's and 30's. So the world's Central Banks are moving to a "mixed basket". Primarily this means a Euro set of monopoly money has been thrown into the world money basket with the already existent greenback monopoly money. So when in the past, there was a greenback dollar competing for goods on the world market. There is now a Euro dollar as well. The results are seen in world trade prices as they are bid up on scarce goods like oil. This is all fine and well. Governments seldom complain about a bout of inflation. But what happens if the greenback snuffs out? That is the greenback falls out of the world trade basket? Then the world is chasing the Euro alone. We then have the classic dollar shortage of deflation. The only way the greenback could survive is if the plan started in mid 2004 was continued. That is raise the cash rate on the greenback 2% per annum until early next decade. Of course this would a dramatic curtailing of the easy life for the US, which has proved politcaly unpaletable. So "helicopter Ben" halted the program early in 2006 and Fed is talking about lowering rates. The greenback is toast! It seems the Americans are so unwise as to think a bout of high interest rates are worse than their loss of the world printing press. They are very mistaken! At some point in the near future the world will panic out of the greenback. The only thing that keeps the greenback going, is China and Opec buying excessive amounts of US T-bonds. They can't keep this up forever. And post Chinese olympics will see the practice come to an end. Japan formerly the great backer of US T-bonds, ceased net purchases in mid 2004. Now the Japanese market is beginning to rid itself of the oversupply of T-bonds. This will be replicated everywhere else. Post 2008 will see the greenback burn for a few years, until it is no more. Until the greenback is purely the domestic currency of the US, only kept alive internally by exchange controlls. This thing has happened before. The 1920's saw the inflation created by the pound and the greenback together. Then beginning in early 1929 months before the Wall street crash, the pound began to wink out. The greenback almost collapsed once before, in August 1979. Then the competitor was gold. Europe and Japan rescued the greenback back then. Otherwise we would have had the depression of the 1980's, rather than the recession! One can conceive of the printing press staving of deflation. But what happens is one day the inflated product is rejected and ceases to be liquidity. Then you get the deflation!
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
But no.....the FED can lower interest rates infinitely if it wants to!
You can half a 1% interest rate and the bonds almost double in value.......0.5%.......0.25%......0.125%...and you can go on forever as per Zeno's theorem.
The fed has one lever and that is the federal funds rate. It can only influence bond yields, not control them.
When people think it is safe to get back in the pool for stocks or land or commodities, they will sell their treasuries and yields will rise. If China experiences any more capital flight, it will be forced to sell treasuries and yields will rise. Operation twist ends on June 30, and absent a replacement, yields will rise at the long end. If the US experiences an inflationary shock, yields will rise.
If still had the treasuries, I wouldn't be selling them today (in fact I still hold some) but it is not a one-way bet.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
Operation twist ends on June 30, and absent a replacement, yields will rise at the long end. If the US experiences an inflationary shock, yields will rise.
You must remind me when they rose in Japan?
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Gilts, Bunds and Treasuries are defensive plays in an uncertain world, and I believe that investors are paying a premium for their perceived safety.
The UK's AAA rating was put on negative outlook by the ratings agencies in March, and yields are well below the rate of inflation. Both of these could force prices down, and I think that the bond market could be at or near its top.
The suggestion of shares is a good one. The FTSE-100 index is around 5250 at the time of writing. It's dipped to around 5000 a couple of times in the past year or two, and fell to below 4000 during the GFC. It's pretty cheap right now, and parking your funds in a cheap index tracker could make a lot of sense.
If you want to stick to bonds, the National Grid, which provides the infrastructure for power transmission in the UK, issued one at around the inflation rate. They're a big company, so the investment would strike me as being fairly safe.
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