Every time you post here, an angel gets his wings and bonds go into rally mode. So thanks for that! Bonds have rallied about 5% since I got back in, so the only thing making me cranky today is the fact that Villanova lost in the second round of the tournament. You can’t imagine how beautiful my bracket would be if Nova was still in it…
When you began beating your chest and started this thread, the yield on the 30Y was at 2.84%. Yet here we are at 2.55%. There's really nothing more to say. But keep bumping this thread - it makes you look like an idiot. :)
Just curious, what in particular made you decide to go the sidelines for now? It wouldn't surprise me to see yields creep up over the next few weeks, and then resume their slow death spiral in May-August. There's a proven seasonal trading pattern there for those with the time and inclination to do take advantage (which I don't).
Following today’s durable goods report, the Atlanta Fed lowered its projected Q1 2015 GDP growth to 0.2% (an annualized number). For those not familiar, the Atlanta Fed has a real-time model for estimating the current quarter’s GDP (called GDPNow), which basically mimics the methodology used by the BEA to calculate quarterly GDP. As recently as mid-February, the model was forecasting 2.3% GDP growth for the quarter, but has since dropped every few days as new data was released. Consensus on Wall Street is still over 2%, lol…
With YoY inflation in the US either flat or negative for 2015, a 2.5% yield on the 30Y is right in line with historical norms (actually a little on the high side, as the rate has averaged 200 basis points over inflation for over a hundred years).
Several months behind the curve (as usual), the Wall Street Journal has an article in today’s edition reviewing Greenspan’s “conundrum”, that time when the Fed raised short-term rates by 350 basis points (at 17 consecutive meetings, from May 2004 through February of 2006) and the yield on 30Y treasuries actually fell (by around 85 bps).
According to the article, some bond strategists are just now waking up to the fact that we may be encountering “Conundrum 2.0”, an era where long term rates stay low (or drop even further), even in the event the Fed foolishly begins to raise rates this year. As I’ve said many times, the long bond is going to do what it wants to do, and there’s little the Fed can do about it. Titled ‘Pushing and Pulling on Rates Riddle’, the article is a must-read for anyone thinking about shorting long-term treasuries.
LOL at Liesman. He's a fool, like just about every other talking head on CNBC. The only person on that network who actually understands the bond market is Rick Santelli, who happens to be a former bond trader.
You’re ignoring the inflation half of the equation. In order to raise rates, she said the committee would need to be reasonably confident that inflation was moving back to their 2% objective. In the economic projections they issued today (available on the Fed’s website), they dropped their 2015 PCE inflation forecast (its preferred measure) to the 0.6%-0.8% range. As recently as December, the Fed was forecasting that 2015 PCE inflation would be in the 1.0-1.6% range. Why would you expect the Fed to even consider tightening so long as PCE inflation continues to trend below their target?
Rather than rely on your interpretation of the interview, why don't we just look at Schiller's own words, which he posted on the Project Syndicate website just 2 days ago:
"According to our model, long-term rates in the US should be even lower than they are now, because both inflation and short-term real interest rates are practically zero or negative. Even taking into account the impact of quantitative easing since 2008, long-term rates are higher than expected."
And by the way, I don't pretend to know how the computers will react to the Fed's announcement tomorrow, and really don't care. The CPI release next Tuesday will have far greater implications for long-term rates.
No, he’s actually right – the Fed has little control over the long end of the yield curve. Long-term rates are far more correlated with inflation expectations than anything else (over the past 140 years, the yield on 30Y bonds has averaged 200 basis points over the rate of inflation). As I mentioned in another thread, the Fed raised the fed funds rate 350 bps from May of 2004 until February of 2006. During that same period, the yield on the 5Y note increased by only 80 bps, while the yield on the 30Y actually fell by 85 bps. Why? Because the rate increases reduced inflation expectations (Alan Greenspan famously called the lower long-term rates a “conundrum”). It doesn’t mean long-term rates can’t do the opposite over a short time period, but over time they always revert to the mean.
The new number was led by a 20% collapse in non-residential investment. At this pace, we'll likely see a negative print any day now...
I doubt the Fed raises rates in any meaningful way, but even if they do it doesn’t necessarily mean that long-term rates will follow. From May of 2004 until February of 2006, the fed funds rate increased by 350 bps. During that same period, the yield on the 5Y note increased by only 80 bps, and the yield on the 30Y actually fell by 85 bps. The rate increases reduced investors' inflation expectations, which is the main determinant of long-term rates. (If you don’t remember this episode, try googling “Greenspan’s conundrum” for a refresher.) Bottom line is that the Fed has little control over the long end of the Treasury curve.
Since early February, 90% of the economic data has missed expectations. This has pushed Bloomberg’s Macro Surprise Index to its worst start to a year on record! The one supposed bright spot, employment growth, is mainly creating low-paying jobs and stagnant wages (keeping in mind that employment is the ultimate lagging indicator anyway, as most of those new jobs were initially planned/discussed/posted months ago when everyone thought the economy was taking off). If the Fed were to raise rates anytime soon, it’s because they’re worried about the asset bubbles they’ve helped create, not because they think the economy is getting overheated.
Surprised no one is talking about this here, as I think this is partly responsible for today’s move up:
NEW YORK, March 13, 2015 (GLOBE NEWSWIRE) -- The NASDAQ OMX Group, Inc. today announced that Walgreens Boots Alliance, Inc. (WBA), will become a component of the NASDAQ-100 Index (Nasdaq:NDX), the NASDAQ-100 Equal Weighted Index (Nasdaq:NDXE) and the NASDAQ-100 Ex-Technology Index (Nasdaq:NDXX) prior to market open on Monday, March 23, 2015. Walgreens Boots Alliance, Inc., will replace Equinix, Inc. (EQIX) which is being removed as a result of their conversion to a REIT.
After February’s dead cat bounce, commodities have resumed their slow death march, with the CRB Commodity Index now down almost 9% since the first of the year. As a reminder, this is not just oil-related, as it continues a four-year trend. The index dropped 8% in 2011; 3% in 2012; 5% in 2013; and 18% in 2014. It is now down 43% from its May 2011 peak.
The Atlanta Fed has a real-time model for estimating the current quarter’s GDP called GDPNow, which basically mimics the methodology used by the BEA to calculate GDP at the end of each quarter. Not sure why it doesn’t get more attention, perhaps because it’s still relatively new (and volatile). At any rate, their estimate for Q1 2015 has dropped from 2.3% just 5 weeks ago (in line with current Wall Street consensus) to 0.6% as of March 12th. The main culprit for the downward revisions has been a fall in CapEx spending, most of which can be traced to the oil and gas industry. But I thought the collapse in the price of oil was supposed to be a net positive for the economy, lol…
It was a weak auction, which I wouldn't have guessed, but that's why I don't make short-term bets - too unpredictable. That said, rates are still practically unchanged. A lot of strange cross-currents are occurring in the bond market these days...
I neglected to answer your question regarding the SPR. That level has not changed in recent weeks, and stands at 691 mm bls (out of a total SPR capacity of 727 mm bls).