The CRB Commodity Index has now gone slightly negative for 2014 (currently at 279.40 per Bloomberg). As one poster put it here several weeks ago, long term bonds are a leveraged bet on deflation (I wish I had thought of that phrase).
Interestingly, the one week when you didn't make one of your "100% certain" predictions that TLT was going lower, it actually did go lower. There's really nothing to say while the Fed continues to muddy the water. I still think interest rates will resume their decline after the Fed actually stops QE3, just like they did at the completion of QE1 and QE2. The increase in yields during the past week feels like the "taper tantrum" from last year, and likely just as unsustainable.
Haha, touché. We shall see how long it lasts, though. This reminds me of the "taper tantrum" from last year, which was also unsustainable.
For those who think the recent rise in long term rates is sustainable, how high do you think they’ll go and how fast? A few months ago, I made my call: that the yield on the 30Y would dip below 3% before year-end. We got within 7 basis points (closing at 3.07% on August 28th), but didn’t quite make it (although the year isn’t over yet).
If the US economy is truly normalizing, you won't see me crying. I have far more of my net worth tied up in commercial real estate than I do bonds. I just think we're going to see our economy weaken as global growth continues to slow.
I'm in the middle of a fairly large apartment deal right now (my real job), so I'm a little distracted at the moment. (While I have a negative thesis on the US economy as a whole, I happen to live and work in one of the hottest real estate markets in the country.) The momentum in rates appears clearly to the upside right now, but I don't think it's sustainable. Here's a quick refresher on what happened leading up to (and following) QE1 and QE2:
Long-term interest rates popped 26 basis points in the week before QE1 ended (on March 31, 2010), and they rose 24 basis points in the week before QE2 ended (on June 30, 2011).
Once QE1 ended, though, rates fell dramatically (in one month’s time, the yield on the 30Y dropped from 4.84% to 4.17%, finally reaching a nadir of 3.53% in late August of 2010). Once QE2 ended, a similar thing happened. From July 1, 2011 through September 22nd of that year, long-term rates fell from 4.40% to 2.79% (a massive 161 basis point drop).
So will history repeat, or is this time different?
Bring up the 5-year chart here on yahoo. Use the 'Compare' function and input XLF, the bank ETF. XLF is up about 50% over the past 5 years, while SAN is down 40% over the same time period. What does that tell you?
That actually makes some sense to me if I understand what you're saying, that options traders can influence interest rates? That seems possible in the short term, but in the longer term it's hard for anything other than fundamentals to influence the direction of a $30 trillion US bond market ($85 trillion worldwide).
At the end of the day, TLT’s price movement is going to reflect interest rate moves (TLT is just a basket of bonds, and bond prices are a pure expression of underlying interest rates). I don’t know much about TA, but conceptually see how herd behavior regarding stock-trading might repeat itself in identifiable patterns. But does technical analysis as a concept really translate to interest rate moves? And if it doesn’t, why would TA work for something like TLT? I'm not trying to argue the point, I'm just trying to understand how TA people think about this.
Correct. Everyone buys SAN for the big "dividend", but it's merely newly-issued shares that dilute the value of the stock over time. Don't believe me? Look at a 5 year chart of the stock price...
Could be, which is why I won't touch Apple now. I sold it at 8x my original investment, one of the best stock investments I ever made. But I realize it was really just luck, and don't want to tempt the fates by ever buying it again.
Not related to bonds, but is anyone starting to get a little worried about this? The WHO's latest case count is 4300. The number of cases has been roughly doubling every 20 days. If this trend continues, that would result in close to a million cases by mid-February. Is that really possible? Surely the developed world will start throwing all kinds of money at this thing before it gets that out of control. Right?
It's the theory of horizontal knowledge transfer. Someone has a knack for a particular asset class (bonds) and thinks he understands every other asset class. That said, I wish I had listened to him when he called for an Apple correction back in mid-2012. I had been holding Apple stock since 2006, and I thought his call at the time was ridiculous. Apple's crash in late 2012/early 2013 was a very painful ride down.
The survey he mentioned was pretty funny. It came out in April, when the yield on the 30Y was around 3.6% (lately it's been around 3.2%). 67 out of 67 economists in the survey said that rates would be much higher in 6 months (I guess they still have 1 more month to save face).
An outlook on bond sectors:
High yield bonds were the most overvalued in history at year end, but now they aren’t as overvalued. Gundlach said he sold some investment grade corporate bonds to buy high yield bonds.
Mortgage bonds have cheapened a bit since year end, but are still fairly valued.
Emerging market bonds are still one standard deviation overvalued, but that’s less overvalued than U.S. corporate debt, so preference remains intact for EM.
WHAT THE FLATTENING CURVE MEANS
The yield curve has really changed this year with long rates coming down and short rates moving up slightly.For historical context, the yield curve flattened tremendously between 2004 and 2006, when the Fed was in a cycle of raising interest rates.
This year, rhetoric on rate rises has increased a lot. Taking the market assumptions of rate hikes next June and overlaying it on the 2004-to-2006 period shows that the Fed could raise interest rates and the 10-year yield may not even sell off. In recent days, it seems almost like the 10-year wants the Fed to raise rates, Gundlach asserts.
“So many market participants talk about the long end being vulnerable, but the message of the market has been the exact opposite,” Gundlach said. “The market is not signaling a blowout on the long ed.”
Gundlach said that he sees the benchmark 10-year Treasury note yield staying in a range between 2.2% and 2.8%. That assessment is driven in part by demand from investors who see U.S. yields as attractive relative to other developed economies, like Germany and Japan, where yields are much lower.