At least eight European countries now have negative sovereign bond yields for maturities of up to 4 years: Austria, Belgium, Denmark, Finland, France, Germany, Netherlands and Switzerland. German yields are negative out to 6 years, while Swiss yields are negative out to 10 years. As Albert Edwards (SocGen) has warned, there is a “tidal wave of deflation” headed from East to West. Both Japan and Europe are exporting their deflation to us. And as the deflation tide rises in the US, and the CPI soon goes negative, bond yields will continue to drop further than most investors believe possible.
At the end of the day, the US can print money to pay its debts, while Spain and Italy cannot. That's a crucial difference in terms of repayment risk. The main risk to US treasuries, then, is inflation, but there are zero signs of that. in fact, we are likely headed to negative CPI prints soon. Going back to the 1950's, there is an 80% correlation between long-term bond rates and inflation, and US bond rates will follow the CPI in its downward path.
I've got a suggestion for both of you geniuses. Go load up on TMV, the triple inverse bond fund. You'll lose your money three times as fast that way!
It’s ridiculous to compare Spanish or Italian bonds to US bonds. Those two countries are basket cases: the unemployment rate in Spain is 24%, while the unemployment rate in Italy is over 13%. The government debt/GDP ratio in Spain is 98% (up from just 70% two years ago), and the debt/GDP ratio in Italy is 132%. There is genuine repayment risk with those countries, and investors should be receiving much higher yields there for the risk (and if Greece exits the Euro, watch those peripheral bond yields skyrocket). It’s absurd and unsustainable for US rates to be higher. The US Treasury market is the most liquid market in the world, and there is no repayment risk. An excellent pairs trade would be to short European periphery bonds and go long US Treasuries. In the December sale of $13 billion worth of 30-year Treasuries, indirect bids, a measure of foreign demand, took 50%! Investors who’ve been front-running the ECB bond purchases will now take their profits and rotate into US Treasuries.
One of Warren Buffett’s favorite leading indicators, the Baltic Dry Index continues to collapse. At today's 608 print, this is the lowest absolute level for the global shipping indicator since August of 1986!
So the Labor Participation Rate is riding at its lowest level in 37 years; the CRB Commodity Index has dropped 32% from its 6/25/14 high (with oil, copper, iron ore and lumber in particular crashing); and the Baltic Dry is at a 29-year low. Welcome to the Recovery!
Lacy, a former chief economist for the Dallas Fed, has been the most accurate bond forecaster I’ve followed over the past five years (he was a lone voice in the wilderness in the fall of 2013 predicting that US rates would fall in 2014, contrary to the vast majority of economists at the time). He’s a rare bird in the field of bond analysts because he’s both a superb economist and a historian of the US Treasury market. In a recent Bloomberg interview (about 2 weeks ago) he stated that the yield on the 30Y would drop below 2% this year. He further predicted that there would be no V-shaped recovery in rates, but that we would see an “L-shape with a soggy bottom”. In other words, he is suggesting a long malaise similar to the experience of Japan…
Keep in mind this was all written several weeks ago. Here was his final conclusion:
"We expect a further rally in Treasury prices with the 30-year yield dropping from the current 2.75% to 2.0%, perhaps by the end of 2015. If so, the Long Bond would provide a total return of 18.8% and the 30-year zero coupon bond, 24.6%. If the 10-year note yield drops from the current 2.17% to 1.0%, as we forecast, the total return would be 12.4%. These may seem like big gains for yield declines of only about one percentage point, but that’s what happens when yields are low. In any event, we believe that “the bond rally of a lifetime” marches on."
From Gary's January 2015 edition of his INSIGHT newsletter:
There are many reasons why we continue to favor long Treasury bonds. Here are 10:
1. Safe haven. Like the U.S. dollar, Treasurys continue to be a safe haven in times of global turmoil and uncertainty, of which there are plenty today.
2. Deflation, extant in many countries and looming in many others including the eurozone, makes current Treasury note and bond yields attractive.
3. Quantitative Easing, underway in Japan and Eurozone, provides money to invest in U.S. Treasurys.
4. Treasury yields are attractive relative to those abroad.
5. More foreigners are buying Treasurys. In the December sale of $13 billion in 30-year Treasurys, indirect bids, a measure of foreign demand, took 50%. The Fed is no longer adding to its Treasury portfolio but foreigners, as well as domestic investors, are more than replacing Fed purchases.
6. U.S. banks are buying Treasurys as they move away from lower-quality assets, in part to comply with new rules requiring the biggest banks to hold more liquid assets and 60% of these must be backed by the federal government.
7. Long Treasurys continue to be attractive to pension funds and life insurance that need to match their long-maturity liabilities with similar duration assets.
8. Junk and corporate bonds are losing favor vs. Treasurys. The spreads between junk vs. Treasurys are widening as Treasurys rally while junk bonds sell off under the weight of heavy issues and investor worries about defaults, especially on weak energy company issues.
9. The odds of a near-term Fed rate hike are receding. Futures markets continue to push back the estimated date of any Fed rate hike. The Fed realizes that foreign central bank stimuli amount to Fed tightening, relatively. These numbers will no doubt be pushed out further as the deflationary effects of the oil price plunge sink in.
10. Postwar babies are aging and this favors Treasurys as older people reduce the riskiness of their portfolios
I actually see the 10Y going to the 1.4% level soon, and sometime this year may test the 1% level. We'll soon be seeing negative CPI prints due to the deflationary pressure in the world's economy (Europe and Japan are exporting their deflation to us). Our interest rates are being sucked downward by slowing inflation and ultra-low European rates.
You have it precisely wrong. A strengthening dollar combined with our higher relative bond yields is attracting money from both Europe and Japan, putting downward pressure on US rates. If you were a fixed income manager at a pension fund, would you rather buy a 30Y German Bund yielding less than 1%, or a US 30Y yielding 2.3%?
You’re looking backward, while the bond market is looking forward. Inventories rose by $113 billion in Q4, the second highest quarterly increase in the past 15 years. As that inventory is now liquidated, it means less production for this quarter. And for the last couple of quarters, GDP received a huge bump via healthcare spending due to Obamacare. That “growth” will now level out. Lastly, oil and gas companies are aggressively slashing their capex budgets, which will put further downward pressure on current GDP. The bond market does not believe the “everything is awesome” hype.
Just three short weeks ago, when Guy Haselmann issued this call, the yield on the 30Y was 2.61%. We're already halfway to his predicted destination...
Hedge funds are still massively short US Treasuries and are getting their faces ripped off in this rally. (You witnessed some of them unwinding their short bets today.) By the way, if you had just bought some TLT the day you started posting on this message board in late November, you'd be up 13% by now.
I hope you're kidding - SBND is an excellent way to lose your money three times as fast. The long bond is headed to the sub-2% range, and rates will likely linger there for a very long time. In Lacy Hunt's colorful terminology, there won't be a V-shaped recovery in rates - it will be an L-shape with a soggy bottom.
A former bond trader, he's the only talking head on CNBC who understands the bond market and makes any sense. He's been suggesting that long-term Treasury yields would drop even further for months.
You’ve been wrong regarding the direction of interest rates for over 12 months now. Do you ever stop to consider that perhaps your investment thesis is fundamentally flawed?
I'd be surprised if they even did a symbolic, one-time increase this year, but I agree that it doesn't matter what they do as it relates to long-term rates.
The bond market is predicting the Japanization of the US and another lost decade. Rates will likely fall even further.
You're correct, it makes no sense for Spanish or Italian 10Y bonds to be yielding so much less than US bonds, which is why it's probably unsustainable (US rates will likely continue to fall as yield-seeking investors eventually rotate from Euro bonds into US Treasuries) . Those two countries in particular are economic basket cases, but speculators are currently front-running the future bond purchases by European central banks.
Primarily insurance companies and pension funds . All institutions with liability structures that require matched asset hedging require fixed income assets on the other side of their balance sheet. And due to the Budget Act of 2013, pension funds are now required to hold more “high quality collateral”, defined as 10-year bond equivalents (US Treasuries with maturities of over 10 years). There’s a shortage of such high quality collateral because the Fed bought so much of it, which is one reason (there are many others) there’s such a relentless bid for long-term bonds