I stand corrected, although I think you actually said that the 30Y wouldn't dip below 3% in 2014. And I wouldn't have dreamed this was possible as recently as 3 months ago, but based on what we're seeing in Europe, I think we'll see the yield on the 30Y approach the 2% level in the next 6-12 months. Strange times...
Since my original post, I’ve tracked down some better information. According to the EIA, the US actually has a total crude storage capacity in refineries and tank farms of around 520 million barrels (as of September 2014). The widely publicized EIA storage inventory number (currently 450 million bls) also includes crude in pipelines and well sites, a crucial distinction (as the amount in pipelines and well sites is estimated to total in the 120 million barrel range).
So subtracting 120 million from 450 million results in 330 million barrels stored at refineries and tank farms. Since 330 million barrels would thus represent only 63% of overall capacity, it looks unlikely that we’d ever see the “all full” level in the US (barring a worldwide depression).
On the other hand, the amount of storage in Cushing, OK, probably the most important storage hub in the US, is approaching its capacity limits, and I don’t know what the full implications of that might be. As of March 4th, crude stock in Cushing was 52 million barrels, and the ultimate working capacity there is around 71 million (so they were 73% full as of last week). In recent weeks the total has been rising by as much as 2.5 million bls per week, so Cushing could conceivably be full in a couple of months at current rates. As Cushing approaches full capacity, lease rates will continue to rise, thus affecting the contango trade.
Production actually hit a new high of 9.366 mm bls/day. And the 4-week moving average of inventory build, at 7.8 mm bls/week, remained unchanged.
Is it really that hard to imagine that Euro bond investors, who’ve literally been front-running the ECB for years, might finally take profits and rotate into US treasuries? Fixed income departments of various pension funds and insurance companies are required to be 100% invested in bonds. What else are they going to do with their ECB proceeds?
We’re at a funny moment right now. Weak macro data should be pushing yields down, yet worries over Fed rate hikes have helped push rates up (which I think is as misplaced as when rates rose over worries about the end of QE3). Now that the ECB has finally started its version of QE, I’ve been expecting investors there to take profits and rotate into US treasuries, but who knows? It’s uncharted territory.
I did sell, when the 30Y was in the 2.5-2.6% range (remember when you said the 30Y would never dip below 3%?). Now I'm waiting for a chance to buy back in. I think the current rate rise is unsustainable (it reminds me of the "taper tantrum" in 2013), but I'm not one to argue with momentum, and right now the momentum is for higher rates. Ironically, 30Y bonds are arguably a better value now than they were when I was buying in the fall of 2013 (rates were in the 3.5-3.9% range then, but inflation was much higher). In 15 of the last 20 years, rates have reached the year's high between late February and early May (last year being a notable exception), so I intend to buy sometime in the next few weeks.
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.