Then how do you explain the fact that bond yields actually dropped each and every time the Fed stopped buying them after QE1, QE2 and Operation Twist?
Season's greetings, riverwins. We made that side bet, what, 4-5 months ago? So far we've both been wrong as TLT is stuck in a trading range and is within 1% of where it was when we made that bet. I've never claimed a new era of economics. Your thesis appears to rely on normalized GDP growth, mine does not. We've had average GDP growth of under 2% since the year 2000. What changed that year? Our combined public and private debt surpassed 260% of GDP (it's now around 360%). Recent scholarly studies have shown that when the 260% threshold is breeched, GDP growth slows dramatically. In the 110 years prior to 2000, we had average GDP growth of around 3.6% annually. We are thus stuck in a period of slow growth and low inflation with no easy solutions (if you try to pay down the enormous debt overhang, the economy slows that much more). Inflation is harder to create than most realize because it requires velocity of money (and our velocity of money is at the lowest it's been in the 100-year history of the Fed). My thesis is that "the USA is the new Japan". I'm about to start traveling for the holidays, look forward to continuing our debate in 2014...
Long term rates aren't low because of the Fed's bond-buying efforts; they're low in spite of the Fed's bond-buying efforts. I expect many more years of low interest rates. We are the new Japan.
The yield on the long bond is mainly tied to inflation expectations. Fed bond-buying actually increases inflation expectations. If the Fed would just quit buying bonds altogether, rates would likely fall even further (just like they did at the conclusion of QE1, QE2, and Operation Twist). The Fed's bond-buying has been counter-productive in terms of lowering long-term rates. I have to think the Fed knows this, and they're lying when they claim they do it to reduce rates. The Fed's real goal has been to pump liquidity into the system and thus inflate asset values and increase inflation (they're more afraid of deflation than inflation). It's hard to create inflation, though, when there's no velocity of money. That's why we have CPI hovering around 1% YoY the past few months.
The CRB commodity 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. Do you think those have anything to do with the real economy?
As of this moment, the 30-year rate is down almost 5 basis points, and TLT holds mostly long-term bonds (with an overall duration of around 27-28 years). If long-term rates go down like they are doing today, then TLT should be up, just as it is.
Like most of us, you're focusing on the costs that go up, and ignoring prices that have fallen. The CRB commodity index is down 20% over the past couple of years. That would not happen if we had strong inflation. If you really think we have such strong inflation, go buy some gold. That's really worked out well the past couple of years!
As I've mentioned ad nauseam here, the main determinant for long-term interest rates is inflation expectations (there's like an 80% correlation between long-term rates and inflation). The last few months we've seen CPI hovering around 1% YoY. It would make sense for inflation expectations to be further lowered with less Fed bond-buying. To a large segment of bondholders, Fed bond-buying is perceived as inflationary. The Fed's efforts to date have thus been counter-productive, at least when it comes to the long end of the yield curve. In the past, at the end of each and every iteration of quantitative easing (QE1, QE2, Operation Twist), rates on the long bond dropped, sometimes dramatically.
The main determinant for long-term rates over time is inflation expectations. All indications are that we're seeing disinflation (CPI of around 1.25%), and the Fed is terrified we might actually see deflation (which means we would see even lower rates on the 30-year).
It was around $.65/share previously, but since Yahoo's summary shows an annual dividend of only $.54/share, investors should be aware that it's much higher than Yahoo might lead you to believe.
I've been patiently waiting months for the 30-year yield to hit 4%, my next buying target (I bought at 3.5% and 3.75%). Yields just can't seem to get over the hump to that level.
Rates might go up briefly when the "taper" finally comes, as the Fed has convinced so many investors that only its magic bond-buying keeps rates down (just one more unintended consequence in a growing list). In previous iterations of QE, rates briefly jumped when the bond-buying stopped, and every single time rates soon started falling (at times dramatically) when economic reality hit. In an economy that averages sub-2% growth, and sub-1% inflation, any increase in rates is not sustainable over the longer term.