A reader writes in with this classic parable:

The long list of reasons by pundits explaining the drop in Treasury yields reminded me of an old Wall Street joke:

Over dinner following a hectic day in the market, the wife of this well-known pundit / stock-picker asks, “Darling, what’s wrong with the stock market?

His reply: “Sweetheart, it has to do with China sinking a Vietnamese fishing boat, the volcanic eruption in Indonesia, the lasts Egyptian election…

Before he had a chance to go any further, she slams her hand on the table and says, “Darling, if you don’t know what’s wrong with the stock market, why don’t you say so!

If anyone has a better answer, I am all ears . . .

Category: Humor, UnGuru

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

### 9 Responses to “Why Are Treasury Yields Falling?”

1. rd says:

I like the argument that pension funds are better funded and are locking in long-term bonds to match liabilities for significant chunks of their portfolios. I wonder if the data actually shows that…….

2. I’m going as far as to call the bond market wrong here [attributable to its Recency Bias]. A 50bp+ drop in 10y seems myopically focused on -1% Q1 GDP. Q2 is tracking higher (3-4%), confirming the weather-related, pent-up demand argument. (Look at rail traffic +4.2% ytd, durable goods/CapEx all +3% y/y after q1′s GDP inventory drawdown, and strong ISM/PMIs.)

Doing the math using [the current \$TNX nominal yield and] 10y TIPS implied figures:
2.48% 10y = 0.26% TIPS real GDP growth + 2.22% inflation average annual for the next 10 years

Now, that 2.22% avg annual inflation might be too high for the next decade’s average, but the 0.26% avg real growth is way too low for my taste — even factoring-in 1 or 2 recessions. A 3% 10y seems fair to me, considering a 2% real GDP trend, 1.6% PCE run-rate, 2.48% 5y5y forward inflation breakeven, and a recession in there somewhere.

If Tsy buyers are afraid of US corporations’ health, then IG & HY spreads wouldn’t be at record tights. (I don’t think these absolute and relative HY spreads are sustainable, but you’d be seeing a widening if bond-buyers were flying to safety.)

I hate attribution, but if I had to, I’d say the decline in yields is at most a result of:
1. Correlation trade w international CBs verbally committed to further QE/easing
2. US pensions reallocating to a glide path

Fully explained here: http://thebuttonwoodtree.wordpress.com/2014/06/01/the-bond-market-is-always-right/

• Sold to you!

A -1% negative quarterly GDP has a strong correlation with “incoming recession”. Even more so when weekly UE claims (as a share of the workforce) are at all time lows, and when GDI also comes in negative. GDI has never printed negative without an imminent recession, but it just did. Could be this time’s different… But IMHO, if you look at YOY comparisons and still see growth, that’s like looking in the rearview mirror and watching the road receding behind your car… you won’t see the recession until your car is in the ditch, cause you’re looking at the past. I don’t trust the ISM’s and PMI’s, which are mostly feel-good surveys of people who on average (practically by definition) will not see the recession coming. Just look at the charts and you’ll see they have no predictive capability for anything other than twitching the stock market. (And as we saw earlier this week, if you play it right and make a “mistake” in the survey reports, you can even make the market go both down AND up in the same day!)

Will there be a recession this year? I don’t know. It might have started in January since we had a negative GDP print. It might have been a glitchy quarter and the real pain may not appear until next year or even 18 months from now. But there will be another recession and it would be unprecedented in many data sets if it took more than 2 more years.

Meanwhile, an entirely different reason for the bond market rising could simply be that it now has upside momentum.

3. Frilton Miedman says:

Part of the answer may lie here -

Or here –

http://www.ritholtz.com/blog/2012/08/bonds-for-the-long-run-2/#comment-634592

4. d_dd says:

Interest rates rise when the Fed is intervening in the markets (QE) as money rotates out of “safety” and into “risk.” ;and visa versa.

I wonder if the effect is observed in the VIX.

5. VennData says:

Why is the stock market up?

If we release five known terrorists into the wild and get one traitor in return, the net effect of that sort of trade repeated over time will bring the Tea Party to power sooner rather than later and thus, prosperity, peace, rising incomes, rampant heterosexuality, whiteness and Jesus worship. And end the scourge of America’s embarrassing attempt to get everyone health insurance, education, and infrastructure.

Sequester Obama, not carbon.

• VennData says:

Well and there’s this. Bernanke sells info that rates will stay really low for a really long time. Hedgies trade it, now Reuters quotes from one attendees notes that:

http://www.reuters.com/article/2014/05/16/us-usa-fed-bernanke-insight-idUSBREA4F0OG20140516

“…At least one guest left a New York restaurant with the impression Bernanke, 60, does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in Bernanke’s lifetime, one source who had spoken to the guest said…”

My opinion:

Ben’s sticking all those guys that volubly,hated him, screamed at him, paid political donations to GOP clowns that wanted to restrict, fire and impeach him… Ben’s sticking those Hedgies with a boat load of bonds they will choke to death on, and they are paying him for the privileges.

Plus they buy the long end for a while making his near-term legacy look better while the economy benefits from the super-low long rates.

If you don’t agree that the college prof would do such a thing? That anyone would be so heartless to charge people for the gun he uses to blast them? LOL Spend some time in DC. Because after that, you will… believe me, you will.

6. ch says:

Because QE is accelerating. Study the TIC reports. 1st 3 months of the year there is ~\$120B in purchases that can’t be reasonably accounted for. Add \$40B per mth to the Fed’s QE rate of 1Q and you get an acceleration.

7. MacroEconomist says:

I am an asset allocator for a family office, Barry.

The answer as to why bonds are falling is pretty simple. It’s because the expected buy and hold returns from equities at these valuations are actually worse than the hold to maturity yield on investment grade bonds or even treasuries for that matter.

The situation today is no different than the one we faced between 2004-2007 when everybody kept asking why the long end wouldn’t go up. If you told an investor on Jan 1, 2004 they would have negative returns 5 years later, they would have laughed at you up until and even after January 1, 2008. And low and behold, bonds beat equities on a 5 year basis from 1/1/04 – 1/1/09.

You will find the exact same thing play out this time except that when you look at margin debt and some of the other things out there, it’s more like 2000 or 2007 than 2004…