Bond Yields Free Fall
I am not sure if I am reading this correctly, but it appears that yields are now back to where they were in the early 1960s on the 10 and 30 year.
Thirty-year Treasury bond yields fell to record lows for a third consecutive day after the Federal Reserve said it plans to make weekly purchases of the debt of mortgage issuers to drive borrowings costs lower.
Yields have dropped every day since the central bank announced on Nov. 25 that it will buy as much as $500 billion in agency and mortgage securities of government-sponsored enterprises including Fannie Mae. Gains accelerated two days ago, when Fed Chairman Ben S. Bernanke said he would consider buying Treasuries and target long-term interest rates to combat a deepening recession . . .
Ten-year note yields fell three basis points to 2.67 percent, near the lowest level since the Fed started keeping daily records in 1962. Two-year note yields were little changed at 0.89 percent.
Must be that savings glut Bernanke used to talk about . . .
>
Source:
30-Year Treasury Constant Maturity Rate
St. Louis Fed
http://research.stlouisfed.org/fred2/data/GS30.txt
Treasury 30-Year Yield Drops to Record Low With Fed to Buy Debt
Dakin Campbell and Daniel Kruger
Bloomberg, Dec. 3 2008
http://www.bloomberg.com/apps/news?pid=20601009&refer=bond&sid=awODxeQoZDHg
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December 4th, 2008 at 4:47 pm
Something’s gotta change course there at some point, right? The question is, when?
December 4th, 2008 at 4:51 pm
It really is unf**kingbelievable.
Hopefully this bubble will burst before I become insolvent.
At least I have company – I can sit in the gutter with Soros and drink a 45.
December 4th, 2008 at 4:56 pm
Hey, Barry-
Love your column. Been reading it for about two years now. Please do a take on REAL interest rates-
mortgages, car loans, student loans, credit cards-that people pay, and why economy won’t turn around until these drop. Reducing government bank rates only enriches banks. It doesn’t encourage me one wit to go out and spend spend spend us out of recession.
December 4th, 2008 at 4:57 pm
10 year at 2.54 – 2.56 range, not 2.67
http://online.wsj.com/mdc/public/npage/2_3050.html?symb=&sid=1224040&page=bond&symbChange=aaaaa%7E0&time=1dy&freq=5mi&startdate=&enddate=&type=64&compidx=aaaaa%7E0&comp=Enter+a+symbol&ma=1&maval=100&lf=1&lf2=4&lf3=1024&DrawChart.x=56&DrawChart.y=12
December 4th, 2008 at 4:58 pm
Barry that’s correct.
Left, I see only 2 possibilities from here.
1) Stocks rally, economy recovers quickly.
2) Depression and all stocks papers become worthless.
Because if #2 occurs a good portion of the population will become poor and lose their job why wouldn’t you bet for #1?
Also remember free markets go away when the going gets really tough for the government. We are seeing this with the bond markets right now. Intentionally lowering the borrowing rate by taking long term treasuries and printing $’s.
December 4th, 2008 at 5:07 pm
@ Mannwich — “Something’s gotta change course there at some point, right? The question is, when?”
I suppose that one could make a histogram of Treasury debt by issue date, for each term of debt, then create a composite showing a schedule of money required to pay back previously-issued bonds, by year. Then make another chart of our national ability to borrow money. When the two lines intersect, that’s when something will change.
Apparently, that date lies somewhere in the future, for long rates to be this low. Either that , or we have a bumper crop of fools this season.
December 4th, 2008 at 5:15 pm
I’ve traded into and have been stopped out of TBT several times since it was at $53 or so (death by a thousand cuts). It’s now trading under $43! There was an interesting post on Treasury Bonds at the Traders Narrative Blog today: http://www.tradersnarrative.com/is-the-next-bubble-in-us-treasury-bonds-2112.html
The gist was that government bonds are NOT in a “real bubble.” I tend to disagree, but I’ve been losing money on the shorts…!
December 4th, 2008 at 5:26 pm
The fed’s h41 report shows custodial holdings have seen a significant shift away from agencies in favor of treasuries. These custodial holdings are thought (eg. Setser) to be a good but incomplete proxy for Chinese flows. This goes some way towards explaining the treasury/agency yield spread.
A quick glance at the CNY/USD exchange rate shows a clear slowing (reversal if you squint) in the strengthening of the CNY. To keep the CNY from rising, China buys US debt, so this goes some way in explaining the treasury “bubble”.
December 4th, 2008 at 5:33 pm
The Fed, Treas., et al, are desparately trying to outrun a landslide.
They have realized that zigging and zagging is not a good approach.
They’ve taken to running flat out, straight- no matter what the consequences, even if there is the possibility of running off the edge of a cliff. They are frightened that they can’t stabilize the economy- because they didn’t listen to TBP and they let problems get too far a head start. What we are seeing is our leadership in panic. Not a pretty picture.
Anything goes.
We, the good citizens have been drafted into the financial army and will spend years laboring to pay one this down.
If you haven’t done so, check out Roubini’s latest missive wherein he talks about stag-deflation. Also interesting and on target is the latest letter from Bill Gross in which he highlights the paradigm shift that has taken place and old equity valuation standards are now useless. Real Clear Markets has both.
December 4th, 2008 at 5:41 pm
These yields and lower yields to come will crush pension funds, insurance companies, etc. Think twice before you buy long term care insurance.
December 4th, 2008 at 5:54 pm
@ Jim, why would you bet on #1 ? I don’t know your situation but investing is about the correct allocation of capital. If stock are going to zero that is not the place to be. You may need your capital to start an new business and employ those who are out of work and have no money. Even if its just running a poor house.
A thesis re; Bonds. Global sell off in equities, commodities and real estate. Dollar hegemony therefore you receive dollars. What to do with your dollars when every asset prices is falling and the Dollar is rising? Keep your dollars in a safe place. Hence treasuries go to zero.
What happens next? Sell off continues much longer than anyone thinks cause that just what happens refer to Soros and reflexivity. Dollar goes much higher ( a bad thing) but notice how gold holds up. Out look for debtor nations gets worse and worse. Central banks efforts to stimulate result in lose of confidence in currencies. Equities rally because there is no where else to put your money. Gold rallies as the dollar sell off finally reccomenses. Worsening economic indicators cause the wave five sell off to finally start. Gold and Silver skyrocket.
US Defaults or currency hyper inflates. A new global currency regeim is established which includes partial baking with gold and maybe other commodities and land. The purpose of the new currency is to finance massive renewable energy and farming projects and infrastructure developments.
OK it just a thought. I hope it doesn’t happen quite that way but history does have a habit of containing massive upheavals somewhere along the line.
December 4th, 2008 at 6:01 pm
I agree with the paradigm shift: return of money rather than return on money.
December 4th, 2008 at 6:26 pm
I’m buying TBT, I keep legging in, I started at $49.75, clearly way early but I’m sticking with it. I’m buying in very small increments as I’m well aware the market can go down longer than I can stay solvent. I’m not a fan of using stops on the ultra’s so I tend to buy them in small increments then buying on dips at pre-determined price points. Following the herd is eventually wrong and I expect this time to be no different.
December 4th, 2008 at 6:34 pm
ben22: “Following the herd is eventually wrong and I expect this time to be no different.”
If only it were that easy.
December 4th, 2008 at 6:49 pm
Well, just so you know, the P&F chart of TBT says 36. PST has a bearish price objective of 41. Are we still wondering where the bail out money went?
December 4th, 2008 at 6:53 pm
Barry,
You know, TIPS only have a 1% premium above other bonds. I think that’s a great deal IF the BLS stops gaming the CPI. Even so, with the massive asset deflation going on while the printing presses are running like mad, it might be very profitable in the next decade to invest in TIPS. You just know that inflation is going to win this one.
December 4th, 2008 at 7:03 pm
@jonbirge
of course my thesis is slightly more detailed than what I posted. that said, I’ll list a few other one’s from recently that were “that simple” if you were patient enough
tech
Real estate
China
Oil, hell almost any commodity
agriculture
banks
subprime
karen, what are you doing with gold?
December 4th, 2008 at 7:11 pm
China is selling agencies and accumulating treasuries in an attempt to prop the dollar so they can continue to import demand – like all state-sponsored price contol measures, this one, too, is doomed to fail.
December 4th, 2008 at 7:13 pm
The last couple of years have been a real education. I’ve learned how completely inept the “science” of economics is, how destructive and worthless the futures markets are and how clueless the smartest guys in the room are.
December 4th, 2008 at 7:15 pm
ben22, cursing at it. : )
actually, my bullion purchase is great as I bought at $420. my miners look bankrupt even though they’re gold mines (hahaha.)
so the 20 year, TLT, has gone virtually parabolic… is it short-covering, flight to safety, or a bubble?
December 4th, 2008 at 7:28 pm
karen,
yes, I started looking at NEM recently, of course I will be early there too. my bullion is also positive.
I think you know what I think about TLT.
December 4th, 2008 at 7:39 pm
You can buy almost anything here long and it will be good. You can count on the PPT to goose the market upward on every chance it gets if it tires to go down to much. They will push the market into recovery and the economy will follow, just like it always does.
December 4th, 2008 at 7:48 pm
i always forget to look at nem. if it holds 28.88 (today’s low was 29) it could gather more momentum to the upside. maybe the institutions will jump on it… the abx chart looks just as good or better, too, on the weekly and daily. $gold could be putting a handle on it’s cup; i would like the miner’s to take the lead here, however.
December 4th, 2008 at 7:53 pm
@jmborchers: Keep repeating that along with the mantra, “there’s no place like home, there’s no place like home” and all will be well again with the world………
December 4th, 2008 at 7:55 pm
Because if #2 occurs a good portion of the population will become poor and lose their job why wouldn’t you bet for #1?
————–
People were getting poorer with #1, they just didn’t realize it until the fundamentals finally started kicking in.
December 4th, 2008 at 8:00 pm
I said yesterday that I saw a short term market rout, because the 10 day MA on put-call was about to have downward pressure. That started…market fell today and so did the 10 day MA. This is very bearish as you are now further from a bottom, despite market fall. Tomorrow could see a massacre and of course that could be due to a horrible NFP.
December 4th, 2008 at 8:07 pm
@ Simon 5:54
Agree completely — one result of this fiasco is the end of the dollar as the world’s reserve curreny. Question is, what replaces it? (TDD by Bretton Woods 3/4.)
Agg @ 6:53
Love TIPS here. Up 5% in a week or so with deflation on everyone’s lips. Could be the “best” (risk/reward) investment of the next decade.
December 4th, 2008 at 8:08 pm
Sorry, clumsy fingers: Question is, what replaces it? (TBD by Bretton Woods 3/4.)
December 4th, 2008 at 9:13 pm
wally, did you nassim on charlie rose? http://www.charlierose.com/view/interview/9713
one of his many great comments, “Markets are stupid.”
December 4th, 2008 at 10:46 pm
GRB settles the world’s public debt – http://www.grb.net
December 5th, 2008 at 1:04 am
Munis seem to be ok. I got 30 year NY Water Revenue bonds at 6.12% the other day. They are rated AA+ . Is anybody else buying long term Munis? I know that there is a risk down the road of high inflation but to get over 9% in tax-equiv. yield is hard to argue with, or is it?
December 5th, 2008 at 1:20 pm
It seems like interest rates required on bonds is a function of expected return on investment (relative to prime rate) plus some portion to account for inflation. It seems like investors have essential the same expected return on investment, but the adjustment for inflation has gone negative (deflation).
It seems confusing. Groceries, Education, Medical are in inflation mode, whereas energy, housing, etc. are in deflation mode. All “the buyout I.O.U. money” would seem to cause inflation, but all interest rates periods seem to be indicating we are in deflation.