And by the way, long term interest rates fell over 100 bps at the conclusion of both QE1 and QE2, contrary to everyone's expectations (and recollections). Word to the wise...
This is third time in the past 4 years that I've been loaded up on long term treasuries. I buy when rates have gone up and everyone is optimistic about the "recovery" and sell when economic reality hits everyone in the face. This has become an almost annual trade for me, and I think it will continue for the rest of the decade.
The yield on the 30Y is clearly headed below 3%, and the yield on the 10Y is headed near 2%. And sometime over the next several years, we'll likely see the 30Y head close to 2%...
Today is a quarterly payment day for those of us who prefer holding their bonds directly, so happy payday courtesy of the US Treasury! Also, congratulations to everyone who bought 30Y treasuries late last year, as the total return is almost 20% year to date...
The CRB Commodity Index has dropped almost 10% in just the past 6 weeks (trading today at 289). For those who’ve been predicting all that inflation from Fed “money printing”, here are the CRB Commodity Index returns from the past few years:
2014 YTD: +3.21%
The index is made up of the following 19 commodities: Aluminum, Cocoa, Coffee, Copper, Corn, Cotton, Crude Oil, Gold, Heating Oil, Lean Hogs, Live Cattle, Natural Gas, Nickel, Orange Juice, Silver, Soybeans, Sugar, Unleaded Gas and Wheat
I appreciate the reply, although your reasoning just does not square with the history of bonds and interest rates. The primary determinant of long-term bond yields is inflation expectations, and ending QE will calm a lot of nerves out there regarding inflation. A 40-50 basis point drop in bond yields from these levels - which I think will happen - will result in another 10% or 11% capital gain in the value of 30Y bonds. No one is "locked in" for 30 years, you simply sell when the yield on the 30Y dips down below 3% (although sometime in the next few years I expect to see the yield on the 30Y approach 2%).
The CRB Commodity index is rolling over; retail sales are down; mortgage apps are down; capex spending is down; Euro bond yields are down; Europe teeters on the edge of recession while Japan and China are slowing down; and new geopolitical hotspots appear monthly. What in the world makes you think higher interest rates are in the cards?
Here's one of my posts from several weeks ago:
"The personal savings rate (PSR) is currently well below its historical average of 8.5%. At the current 4.8%, it’s about the same as in the first year of the Great Depression and slightly below the 5% in the first year of the Great Recession. A low PSR indicates that households will have less purchasing power in the future, as they have to service more debt..."
Do you want me to draw a map for you next time? So here's something for you: Back-to--school sales this month will also disappoint. And it's not about the polar vortex...
And here's Fischer's money quote: “Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back,” Mr. Fischer said in prepared remarks for delivery at a conference in Stockholm. “These disappointments in output performance have not only led to repeated downward revisions of forecasts for short-term growth, but also to a general reassessment of longer-run growth.”
Fed Vice Chairman Stanley Fischer said in a speech last night that Larry Summers, who in recent months has suggested the US economy might be stuck in a period of secular stagnation, could be right. The IMF last month also said that Summers might be correct in his gloomy analysis. Fischer noted that there was surprising weakness from the supply side of the US economy – labor supply, capital investment and productivity.
What does it all mean? It means that one by one, establishment economists are publicly admitting that we’re turning Japanese: doomed to an era of stagnant growth, low inflation, and low interest rates. I’ve traded this theme for the past several years (buying treasuries when hope is flourishing and rates have risen, and selling when reality hits everyone in the face and rates have fallen). But this almost annual trade may soon be over once the rest of the investment community starts to fully realize that we’re the new Japan…
My gut tells me a lot of bad things can happen over a weekend in this particular environment.
I have no idea regarding the short term, which is why I don't trade short term. I do think the yield on the 30Y is headed below 3% later this year (just like it's done 5 out of the last 6 years). GDP lately is just an exercise in inventory expansion and contraction (inventory build-up accounted for 40% of the Q2 GDP estimate). Most of the job creation is part-time or low-paying, so the consumer is tapped out. And the plunge in the price of oil is going to have a ripple effect, so watch for inflation to revert back to the 1.5% range.
Maybe you should start doing the opposite of what your instincts tell you. Remember Jerry’s advice to George Costanza: "If every instinct you have is wrong, then the opposite would have to be right!"
Rick Santelli, the only guy on CNBC who ever makes any sense, said this morning that a test of the 2% level for 10Y treasuries is in the cards, due mainly to slow economic growth and low productivity gains. He admitted that geopolitics is playing a role in the past week, but said the trend would still be down even without those exogenous factors (albeit at a slower pace). A 2% yield on the 10Y would suggest a yield below 3% on the 30Y based on the spreads we’ve been seeing the past few months. A dip below 3% on the 30Y will take TLT north of $120.
It wasn't a "loan", it was a bailout, more analogous to an equity infusion. And the expected return on a risky equity investment of that nature would be far, far higher than a "loan".