I can't help but revisit Russel Napier's poetic warning from two months ago. Not only was his intuition about the price action of October 15th entirely correct, but also his warning to equity markets in the event the 5Y implied inflation rate dipped below the 1.5% level. As of today, the 5Y implied inflation rate stands at 1.22%.
Scotiabank’s Guy Haselmann has been eerily accurate the past two years with his interest rate predictions (even predicting the short-term rise in rates before last month’s FOMC meeting). But in his most recent note, after reviewing the impact of a rising US dollar, the collapsing velocity of money and extreme over-indebtedness around the world, he comes to the following remarkable conclusion:
“I can envision the 10-year note trading to a new low yield (below 1.38%) and even below 1%. I expect the yield curve to flatten viciously this year. I remain a bond bull and believe the 30-year yield will trade with a ‘one handle’ (i.e.; below 2%) in 2015.”
As I’ve been saying here for months, interest rates will fall further than most investors believe possible…
Just ran across this compelling Gundlach quote from a Swiss publication, pointing out the discrepancy in US bond yields:
"In Europe, there have been three years now of lack of concern. In Italy, ten year government bonds are yielding less than 2%. In Spain it is 1.7%, in France 0.9% and in Germany 0.6%. So it is not Japan that sticks out anymore. The outlier is actually the United States with 2,2% on the ten year treasuries. Yields in the US are too high. I do not know why anybody in France owns French bonds. You can more than double your income by buying U.S. bonds – and the Dollar is heading higher. So no wonder bond yields in the U.S. have a hard time retracing to higher levels because it is a relative value play. Sadly, in today’s world of developed bonds 2.2% represents value."
Wow, that's a great find - I didn't know it existed. EDV was up almost 40% in 2014, so I'm guessing it owns mainly Treasury strips. I kind of like getting the quarterly interest payments from my staggered bond holdings, but EDV looks like an excellent way to bet on the direction of interest rates.
I prefer to hold 30Y treasuries directly (because I can create longer duration than a fund like TLT), but TLT’s total return came close to a basket of 30Y bonds in 2014. TLT’s total return was around 27% (principal gain plus interest payments) in 2014, while my basket of 30Y bonds provided a total return of 29.5%.
Interestingly, the Wasatch-Hoisington US Treasury Fund (ticker WHOSX) provided a total return of around 32.5% in 2014. Anyone who’s read my posts here for the past year and a half knows I’m a huge fan of Lacy Hunt, who directs the investments in that fund. Lacy was able to goose the returns of WHOSX by adding zero coupon 30Y treasuries to the mix (which added to the overall duration of the fund).
I agree that the 1930's is a good analogue for students of the bond market, as is the experience of Japan for the past two decades. The root cause of most of the world's economic problems is extreme over-indebtedness, which sucks oxygen out of the global economy, suppressing growth and interest rates. Debt levels have only increased since the financial crisis, so nothing has been fixed. Ultimately, some type of debt destruction or restructuring will be required, along with stimulus in the form of lower tax rates.
When I posted notes from Jeff Gundlach’s September 9th webcast here, the usual suspects ridiculed them. On that day, the yield on the 10Y was around 2.5% and the yield on the 30Y was 3.23%. Gundlach explained in excruciating detail why interest rates were headed lower, not higher (despite all the hand-wringing about the Fed ending QE3). Fast-forward to today, where the yield on the 10Y is 2.05% and the 30Y is yielding 2.62%. The punchline? In this weekend’s Barron’s, Gundlach suggested that the yield on the 10Y might test the 2012 low of 1.38%. That’s another 65 basis point drop from current levels! And assuming the 10Y/30Y spread stays around 60 bps, this would imply a yield on the 30Y of around 2%!
Here are the yearly low yields of the 30Y since 2008: 2008 (2.56%); 2009 (2.86%); 2010 (3.53%); 2011 (2.76%); 2012 (2.45%); 2013 (2.83%); 2014 (2.70%); 2015 (2.69% currently)
Are the treasury bears finally willing to entertain the possibility that maybe, just maybe, we are repeating the experience of Japan? Today marks the seventh year out of the past eight that we’ve witnessed the yield on the 30Y below the 3% level (2010 being the sole exception).
We’ve seen quarterly spikes in GDP before (3Q GDP in 2013, for example, was 4.1%), but they don’t seem to last. Third quarters in particular are suspect, as the US fiscal year ends in September, and federal agencies do everything they can to spend any remaining budget money (lest those budgets get cut in the future). Add to that a global slowdown and crashing commodity prices (oil, iron ore, copper), and the bond market is telling us the economy is slowing down, not accelerating.
Selling off any real estate assets was probably not a bad idea in this low cap rate environment (I'm guessing a WAG leased, single-tenant property would sell at around a 5.5-5.75% cap rate). Surely WAG can achieve a higher return on its capital than 5.5%. I don't know enough about the operational entities you mention, but perhaps Wall Street thinks those businesses were not that profitable anyway? If your main complaint is that there is a lot of financial engineering supporting the stock price, one could make that same complaint about the vast majority of S&P 500 companies nowadays...
Grant may be erudite, but he's been wrong the past few years regarding the direction of interest rates. What specifically is he pointing to as a catalyst for higher rates? Increased economic growth? Higher inflation expectations? Both of these seem to be turning back down at the moment, and artificially low interest rates in Europe should continue to act as an anchor on US rates. Somewhere in Japan, a Japanese version of Jim Grant has likely been predicting higher interest rates there for the past 20 years...
I only stop by here occasionally, but you've been dead wrong on this stock for a long time. I bought WAG three years ago for around $34/share, and all it's done since is pay me a nice dividend and go up in value. And I'd much rather shop there than a creepy CVS store. Seriously, what's not to like?
Rates are approaching Great Depression levels for the same reason they did in the 1930's: extreme over-indebtedness is choking economic growth. The US has averaged real GDP growth of only 1.8% annually since the year 2000 (half the rate of the previous 130 years). The total debt (public and private debt combined) to GDP ratio surpassed 275% in that year, and is now around 345%. So long as we have this weight tied around our necks, real GDP growth will remain anemic, and interest rates will follow suit.
You keep referencing people who know very little about the bond market, or have gotten it completely wrong in recent years: Jim Cramer, Henry Blodget, Brian Kelly, Jim Grant (who's been predicting higher rates forever), etc. What were their predictions for 2014? I'm betting they all forecast higher rates for a year in which rates crashed and 30Y bonds provided a total return of 30%. Perhaps you should start following the contrarians who actually got it right and have been right for the last several years, such as: Lacy Hunt (Hoisington); Jeff Gundlach (Doubleline); Guy Haselmann (Scotiabank); Bob Janjuah (Nomura); Albert Edwards (SocGen); and Gary Shilling.
We'll be stuck in this low range of interest rates for another decade or more (we're repeating the Japan experience). I'm not saying it's not tradable, though. Sell or short bonds when the Fed announces QE4, and buy them back when the Fed ends QE4. Sell them when the Fed announces QE5, and so on...
Bank of America reported last night:
“Large speculators strongly increased their net short position on 10Y T-notes to -$25.8 billion from -$20.1 billion notional.”
This is the largest net short position in three years. And when speculators do that, the market usually moves the opposite direction…
Investors waiting for higher interest rates over the past 5 years are a better example of waiting for Godot. Higher interest rates are always supposed to be right around the corner, but they never seem to get here. Look at an interest rate chart for the past 5 years and you’ll see lower highs and lower lows. There are too many deflationary forces in the world at the moment: China and Europe slowing; commodity prices crashing; Japan trying desperately to weaken the yen; etc. When these all combine, the path of least resistance for global interest rates is downward. As I’ve said many times here, I believe interest rates will fall much further than most investors believe possible. When the Fed announces QE4 to combat the coming deflation, THAT will be the time to sell bonds (or even short them).