I’ve been saying for several months here that the Fed wouldn’t raise rates this year, but why should you believe me? Instead I give you both Warren Buffett and Jack Welch, today lobbying hard against a rate hike:
Jack Welch said it would be “crazy” for the Federal Reserve to hike interest rates in the current economic environment. “I think it would be ludicrous to raise them right now with the situation we have. We’ve got oil problems…and we’ve got a strong dollar, which is killing exports,” said the former boss of General Electric in an appearance on CNBC. Higher interest rates would only cause the dollar to strengthen further and exports “would fall off the table even more,” said Welch.
And in an interview with the Fox Business Network, Warren Buffett said he didn’t think a rate increase would be “feasible.”
“I think it is going to be very tough to raise rates when you’ve got what is going on around the world,” Buffett said. A rate hike would “exacerbate” the problem with the stronger dollar and flows into the U.S., he added.
For the record, I think whether the Fed hikes or not is a nonissue for long-term rates anyway. In fact, I think we'd basically repeat the experience of 2004, when the Fed raised short term rates and long-term rates actually fell (Greenspan's "conundrum", google it). But some people around here seem to think it matters...
The SocGen analyst you’re referring to is Albert Edwards, and in that same note he predicted that Japan would unleash “a tidal wave of deflation westwards” as other Asian countries are forced to respond in kind to the BOJ's efforts. And if that’s truly the case, then those deflationary pressures will push our interest rates down even further than they already are.
For the past 140 years, the yield on 30Y bonds has averaged 4.1%, so I don’t know where you’re getting that. Inflation over that same 140 years averaged 2.1%, so the real yield was 2%. From 1948 to 1989, a time of high inflation, the 30Y yield averaged 6%, but inflation during that time averaged 4.3% (so the real yield was only 1.7%). Regardless of era, the one thing that matters more than anything when it comes to long-term Treasury rates is the rate of inflation.
After his speech today, Kocherlakota actually suggested that the Fed should consider more quantitative easing. They're all nuts, but he's particularly insane. When we start hearing this kind of talk from some of the other Fed presidents, that will be my signal to sell.
GREK is up 15% today, and up 28% since Friday's close. You finally had a good idea, yet you didn't try to capitalize on it. Why is that?
I agree, it's curious how each region reacts a little differently to the QE. In the US, in recent years anyway, it appears that it still succeeds in raising inflation expectations, and so long-term interest rates rose during QE1, QE2 and QE3. In Japan, I think investors long ago lost faith that the BOJ could increase inflation there (and the larger debt overhang that QE encourages is perversely deflationary). And now the BOJ is monetizing almost all of Japanese debt, so it would seem a "market" no longer even exists there. The Eurozone is also a weird dynamic, as they are experiencing devastating deflation in some countries, but not others. Maybe Euro investors are not convinced that QE will create inflation there either? Maybe they're waiting until the actual bond-buying begins? I really don't know, as I don't study that market.
You know, if the Fed announced QE4, or if I sensed that inflation was starting to trend upwards, I would immediately take profits. But for now, the inflation trend is still down, and the deflationary pressures that have pushed rates so low are still intact. This is the third time I've been in long-term bonds over the past 5 years, and waiting until a QE announcement before selling has served me well in the past.
You've been saying such things for over a year now, yet my 30Y bonds have returned almost 40% since the end of 2013. Now tell me again, who's the dummy? :)
In the 10 short days since I made this post, the US 10Y has dropped 16 bps (to 1.66%) and the Spanish 10Y has increased 13 bps (to 1.48%), closing the spread to just 18 bps. Rates are finally rationalizing, and anyone who figured out how to pull off Guy Haselmann’s suggested pairs trade (long US treasuries, short Euro peripheral bonds) is doing well…
Good point. Since I prefer to own 30Y treasuries outright, I didn't even know when the ex-date was for TLT.
This is a huge positive in the long run, and I wish he would sell off his remaining stake. He's been the main obstacle preventing someone like Nike from buying out the company.
Not sure what you're looking at - Spanish and Italian 10Y both rose 3 bps today. And I loaded up on 30Y treasuries in the fall of 2013, so I'm no day trader anyway (read my posts here for the past 12 months). We've seen US treasury yields tick up for all sorts of reasons in the short term, but then they always resume their long, slow death spiral.
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."