That's possible, but I'll need to see a rise in commodity prices before I'm convinced inflation is making a comeback, and that's still not happening. Only time will tell.
Speak of the devil. I just ran across a Reuters story from this morning ("It’s no JK: Oil spread blow-out portends new price slump") that discusses the massive inventory build occurring in Cushing, OK. Some choice quotes:
"Cushing is filling faster than we had expected back in January," said Michael Cohen, head of energy commodities research at Barclays. A wider spread is necessary to "incentivize storage" at locations beyond Cushing, where it tends to be less profitable or riskier to store excess oil.”
“While stockpiles in Cushing have risen for 18 of the past 20 weeks, the flows have quickened over that time. In the four weeks to Feb. 22, inventories rose by nearly 10 million barrels; in December, they rose by around 7 million. They now stand at 48.7 million barrels, while analysts and traders estimate operable capacity at 60 million to 72 million barrels.”
"What happens to a barrel of crude oil if no one wants it and no one can even store it?" asked Walter Zimmerman, chief technical strategist for United-ICAP. "How do you even value that crude?"
If the yield on the 30Y reaches 2.75%, I'll actually start a new position. And if we see 3.00%, I'll buy some more, and so on. I still think we'll see the 30Y dip down to around 2% in the next 12 months.
The price of WTI appears to have bottomed for the time being, but the latest EIA report pegged current US oil inventory at the 434 million barrel level. Reasonable estimates for US storage capacity are in the 450-460 million barrel range (not including the SPR or floating storage). So if we continue to see inventory rising by 5 or 6 million barrels a week, we could theoretically reach the physical limit in 5 or 6 weeks. So what do you suppose would happen to the price of WTI then?
That's funny. I never had the knack for that kind of trading - I just bet on longer term trends. By the way, for the past 20 years (last year being one of the exceptions), interest rates have tended to reach their yearly highs between late February and early May, when investors seem to feel particularly hopeful and optimistic about the economy. If yields on the 30Y get much above 3%, I'll likely start dollar cost averaging back in.
I seriously doubt anyone on this board bought bonds due to anything you or I had to say. I still think patient investors will be rewarded over the next 12 months, though, and anyone who bought in late 2013 or early 2014 has done awesome. Those that bought in the latter half of 2014 have also done fine. When you have large profits to protect, it all becomes a different value proposition. I did the same thing in early 2012 (selling my 30Y treasuries to protect some large profits), and ended up regretting it, as rates proceeded to drop another 100 basis points that year. I missed out on a huge move to the upside, and I have a feeling I may have just made the same mistake I made in 2012.
As I loaded up on 30Y treasuries in the fall of 2013, I took a lot of heat on this board as I advocated for long-term bonds (as every financial “journalist” and his pet rabbit were telling you that rates were only going up in 2014). In the summer of 2014, I suggested here that the yield on the 30Y would eventually fall below 3%, and later in the year predicted that rates would fall further than most investors believed possible (I believe the 2.25% yield on the 30Y that we saw in late January qualifies).
I still think yields on the 30Y will test the 2% level in the next 12 months, but rates can go up for a number of reasons in the short term before resuming their inevitable decline. I sold for two reasons: 1) I wanted to protect my profits (about a 25% total return) from an irrational increase in rates that reminds me of the equally transient “taper tantrum”; and 2) I found myself thinking more about bonds than my real occupation, which is the commercial real estate business. That’s just silly, and probably means I had way too much invested in bonds. This is the third time I’ve been in and out of bonds in the past six years, by the way, each time earning between 25-35% total returns. I’m now in the unusual position of rooting for higher rates so that I can get back in.
My final prediction: we’ll see yields on the 30Y stuck in a range of 2% to 3.50% that will last not just years, but decades. As everyone will slowly, gradually realize, we are the new Japan…
Good luck to all!
The price action kind of reminds me of the "taper tantrum" in 2013, which made no sense but lasted for months (and provided a great buying opportunity in the fall of 2013). Interest rates can be quite unpredictable and volatile in the short term (which makes me tempted to exit soon and sit on the sidelines for a bit), but they always revert to their long term patterns eventually.
Yes, Goldman survived thanks to a backdoor bailout via AIG, and that's kind of my point. They have far too much political power and influence thanks to their alumni, who hold positions of power in central banks all over the world.
Is Goldman Sachs laying the groundwork for negative interest rate policy in the US? Although the note from last night begins, “We think it is unlikely that the Fed would want to implement negative rates in the US”, it goes on to address the question in depth. But if it’s so unlikely, why even go there? The note explains how it could be done logistically:
“…there are significant "systems issues" that would need to be overcome if the Fed were to push short-term interest rates into negative territory. Treasury bills can currently only be auctioned at a discount or at par value, not at a premium. In addition, the minimum coupon on a Treasury note or bond is 1/8%, and negative yield bidding is not allowed for nominal securities. While if push came to shove we believe these issues could be overcome, just as they were with "Y2K" for instance, the implementation cost could be substantial and there could be scope for unwelcome surprises.”
So is the vampire squid trying to give the NY Fed a hint? Because I think we all know that what Goldman wants, Goldman eventually gets…
Funny you should ask that. I was just looking back at my notes regarding the last time I was loaded up with 30Y treasuries. I was buying in late 2010 when yields were around 4.25%. Rates briefly bottomed around 2.97% in late January of 2012. They went up quickly, about 45 basis points, in the following 6 weeks. In a moment of weakness, I sold, even though my bullish thesis was still intact. By July of that same year, the yield on the 30Y had dropped to as low as 2.45%, so I missed a huge move to the upside. Just like anyone, I'm at my weakest when I have large profits to protect. So my long answer to your question is, I'm not sure. I still think we are in a secular downtrend in rates, and will see the 30Y dip below the 2% level sometime this year, but countertrend rallies can be powerful, and it's possible that I'll make the same mistake I made in 2012, and sell too soon.
Foreign demand (mostly central banks) was actually strong, taking down 49.4% of the newly issued bonds (foreign buying usually averages 44% for the 30Y). That number was in line with recent prints of 48.9% and 49.8% in January and December. There was slightly weaker demand from the Primary Dealers, though, who were probably loading up on Apple stock instead.
I know you happen to be a deflationista, based on your comments here in the past, but is your bullish thesis on treasuries based more on technical analysis, or on a fundamental analysis regarding the global economy? Or is it both equally?
I understand your arguments, but I happen to think we're repeating the experience of Japan, and will be experiencing inflation that is far different from what we've seen in the past (the past 50 years, anyway). Over the past 20 years, inflation in Japan has averaged 0.1%, barely unchanged. And they've been doing their own versions of QE over that time in an attempt to create inflation (which is part of the reason they're so screwed up). My playbook for investing these days is the experience of the US in the 1930's and Japan for the past 25 years. To each their own.
Here’s another way of looking at it. During the first half of 2014, inflation averaged 1.7%, while the yield on the 30Y last February was 3.7% (resulting in a “real” yield of 2.00%). If inflation for 2015 ends up being around 0%, as forecast by BofA, then today’s “real” yield on the 30Y of about 2.5% will actually be 25% higher than a year ago. Long term bonds are arguably a better value today than they were a year ago when you take inflation into account.
Today’s 10Y auction saw the highest Indirect Bid (typically foreign central banks) since December of 2011. Indirect bidders took 59.5% of the notes, compared with an average of 48%. Tomorrow’s 30Y auction should be interesting…
I sold my MAT shares back in October based on your detailed posts (and the fact that the price action kept confirming your analysis). I actually bought Hasbro shares with the proceeds. Except for Hasbro's brief kooky idea of buying a movie studio (Dreamworks), I've been very happy with the stock. Hasbro should also profit from the Star Wars juggernaut coming at the end of this year.
I've noticed that you have a spooky habit of being right. Do you base your predictions on technical analysis, or fundamentals?