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Are Bond Yields Set To Soar? Not So Fast
Via Eric Hickman of Kessler Investment Advisers,
US Treasury yields have risen sharply in the last four weeks with 10yr yields higher by about 50 basis points. We are the first to admit that we didn't see this coming, but other than the secular and political interest rate bears, no one else did either.
Direct causation is hard to find. While the economic data has improved in places, the prices have moved much more than the facts. For just about every good piece of data, there was an equal piece of bad news. For instance, where the jobs report showed an unemployment rate improving to 7.5% from 7.6%, the broader underemployment rate (U6) that includes those that would like to work but haven't looked for a job in the last 4 weeks, worsened to 13.9% from 13.8%. Durable goods orders came in better than expected, yet Industrial production came in worse than expected. New home sales were
more than expected yet Building permits were less than expected.
For the whole picture, it helps to consider indicators that combine individual data for the month into a single number. All of these show a slowing, not improving economy. The Chicago Fed National Activity Index showed a decrease in aggregate activity, the coincident indicators index (correlates well with real GDP growth) grew at just an annualized rate of 1.2%, and our 'Kessler Interest Rate Economic Indicator' modeled after the Chicago Fed National Activity index is showing a decrease as well.
Then of course, there is Ben Bernanke who made the slightest hint to the possibility that a tapering of purchases could begin "in the next few meetings" if the economics warranted. It wasn't so much what he said on its face, but just that the markets hadn't imagined this possibility was even entertained by him until that moment. But trying to position a trade based on the impact of the Fed quickly becomes a reflexive exercise going no place because the Treasury market finds a way to reflect macroeconomics despite them. The history of the Fed shows that economics always trumps their effects. This isn't to say that at any given moment, the Fed may have interest rates at a different level than they otherwise would be, but it isn't useful to use this as a reason to buy or sell because a change in their buying could just as easily mean that the economy will be weaker and thus rates would fall as that they would cause rates to rise.
Regardless, yields have risen dramatically and we are not trying to dismiss it. The price is the price, however; it is important for us to express our thoughts for where we think yields are ultimately going, especially when there is virtually no one out there to make this case. We also realize that the market never trades based on what the economy looks like now, but rather where it thinks it will be.
And so, what this recent yield back-up boils down to is that the market is expecting that there is self-sustaining, above trend, GDP growth coming. It isn't often that prices become this divorced from fundamentals. Expecting self-sustaining above trend growth is hoping, not the result of a careful analysis.
We continue to think that no matter how forceful this back-up has been, or where it ultimately peaks, we will see new low yields in the Treasury market before this cycle is over.
...
We cannot know if this yield backup has run its course but from our perspective, it isn’t a question of “if”, but “when” yields resume their downward trend. As always, we look forward to the time when economics deem a shift from being fundamentally long to fundamentally short interest rates, but we do not see this yet.
Here is why we think they won't stay up here for long- (7 Short-Term and 3 Long-Term reasons)
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Moar!
Soar!
you think these guys are bad, wait til you see the ones in Congress!
The Fed will keep buying and buying. The Obama Administration just ordered an extension of their mortgage modification programs, HAMP and HARP, for 2 more years. Even through they suck! Look here:
http://confoundedinterest.wordpress.com/2013/05/30/obama-administrations-extends-loser-hamp-and-harp-mortgage-modification-programs-for-2-years/
The government is ADDICTED to intervention. And the midterm elections are approaching.
We cannot know if this yield backup has run its course but from our perspective, it isn’t a question of “if”, but “when” yields resume their downward trend...
Agree wholeheartedly. The latest bullshit move in us treasurys will not last. 1% on the ten year within five years is my call.
I'm with you, Buzz.
In spite of the fact I'd Love Higher Rates
I'm long bonds and gold
"Direct causation is hard to find"
No it's not. It's all about the Yen. As long as they keep the yen from falling sharply, yields wiill play nice. If the yen resumes it's sellofff sharply, yields will rise like they have been.
This is no longer about the fed and the U.S macro picture. I would be short bonds and long gold. But that is a long ass term play.
That's a good play fonz.
bingo!
That's a Gross bet I bet
http://www.bloomberg.com/news/2013-05-16/gross-says-bond-bull-market-pro...
he's still a buyer...they all take Squid lessons.
You are correct. Shorter term Ts and TIPs most recently, expecting a rise (a normalization, normalization, ha, good luck with picking the bottom in rates without insider info Bill). He was bearish for quite awhile but got religion after being beat about the head for some time. Personally I don't see how anyone can pay pimco 75 bps to underperform the benchmark.
Probably the same folks that "invest" in money market funds.
If the Fed starts buying more treasuries, then it kills the dollar and all dollar-denominated assets. If it doesn't buy treasuries, who will? Discuss...
As long as the other major CB's synchronize printing speed, nothing will happen "currencywise", but.........always respect speed limits!
Global coordination of currency destruction only accelerates the realization of the theft (and world war) as purchasing power will start to evaporate exponentially faster for everyone. That's the thing about a "speed limits" on slippery slopes.
Actually I think coordination hides the realization of theft (though it makes the impact at the end worse, of course.)
When I ponder this as well as my "they're locking the exits" epiphany I had here a couple months ago, it only makes sense. They need the financial ecosystem to be closed so that no one has a functional reference to see the destruction taking place this very moment, so they make sure everything occurs inside the current financial sphere. I agree purchasing power will evaporate exponentially, but I think TPTB are trying to defer the realization of such as late in the game as is possible.
One can only speculate as to the motives, but these fellows are control freaks, and the last thing they want is people waking up early, as that removes control. Secondarily I'm sure it's also so they can load up on cheap durable assets with free money ahead of the reset. (Which tells me that they'll suddenly be sticklers about property rights post-reset, if they're able to retain power through it.)
All depends on how many hollow-points a drone can effectively carry and deliver on target.
I think it's safe to say that when hollow points are raining down from drones inside the US that 1) control has been effectively lost and 2) people either have already woken up, or will imminently. Having a neighbor or cousin turned into a pink mist by a reaper is one hell of an alarm clock. (It'll have to be an immediate relation, because if it goes this far, it definitely will not be on the news.)
I'd go so far to say that within 18 months of the first kill of an unindicted US citizen more than 100 miles from the Mexico border we'll either have a completely new government or open (but unreported) rebellion. It's one of the bigger countdown items on my list to reach SHTF.
This is a really stupid article.
Funny how the auther puts the 30 year bond bubble rise in the bacdkround without even realizing it..
Exactly laws. Exactly right. Japan kicked off the nasty feedback loop. The toothpaste is out.
My guess is they tank the market to scare people into treasuries. But it's all about the Yen.
Almost tick for tick with the yen, mostly because those who understand what Japan is doing realize it is a direct threat to the Administration's showcase GM (and Ford).
If Japan can crush the yen and drop Toyota prices by 1/2, GM and Ford stop selling cars.
The BOJ is legally authorized to directly buy stocks. They can move the Nikkei at will. But they are an infinite source of money, and they face another infinite source of money in the Fed if the Fed buys yen, and they might already be doing that. Then you have, for the first time in this ongoing crisis, two central banks who are NOT cooperating.
If you are BoJ, you will not be happy if someone else's CB is manipulating your currency. You will have to respond.
And so the 10 year Treasury is going to be backstopped by the Fed. They cannot allow rate increases on the 17T in government debt.
The Fed and BoJ will confer and try to find some other solution for Japan. Bernanke can thus singlehandedly end Abenomics.
Or maybe, more simply, everyone has realized thanks to people like Kyle Bass, that Japan is totally screwed, and their currency is going up in smoke, So while Japan is in it's death rattle, everyone is trying to look calm as they head towards the exits so they don't spark a riot.
As those Yen trades are unwound, The long end of the curve gets barfed up and the fed has to come in and buy them. This willl get out of control and it is why the Bernak will be long gone in August.
No one gives a shit about Toyota prices right now. Japanese Banks are scrambling for survival.
"No one gives a shit about Toyota prices right now."
Really?
Ford CEO Says He’s Concerned About Effect of Weakening YenFord Motor Co. (F) Chief Executive Officer Alan Mulally said he’s concerned that the depreciation of the yen is bolstering the competitiveness of Japanese carmakers.
Ford CEO Says He’s Concerned About Effect of Weakening Yen
Ford Motor Co. (F) Chief Executive Officer Alan Mulally said he’s concerned that the depreciation of the yen may cause a global market crash of epic proportions and has purchased a large residence on a greek island that contains piles of gold bullion, various currencies, food and munitions to last a century.
Which headline do you think the press will release?
Sure there are trade wars being fought, but at this particular moment it is survival mode for a bunch of people behind the curtain. This takes precedence.
Guys, guys, you are getting distracted by the paper bullshit. Eventually this comes down to a crisis point and fundamentals take over . Think about it this way, who or what is behind the debt in both countries? Energy issues aside, Japan is a homogenous county of productive, disciplined savers. Now compare that to America.
Those disciplined savers unfortunately chose to save their money in their countries bonds, and when they realize what they got themselves into, they are going to light the match that burns down their house and ours as well.
Fonz,
this is so easy its not funny..... Japs are selling Tbills and repatriating how far that goes is what remains to be seen, today was a lighter day for whatever reason, so the short term liquidity issue must have eased. When the stocks come down, and they will (Unless Ben goes full retard and doubles down to 120 a month), money will flow into treasuries. After stocks have tanked, and their is smoking ruin everywhere then Yields will take off to handcuff Krugman and company.... to the disaster that they have created. Easy to see it, just impossible to time it...
I seriously want to thank you for posting that. I mean this is so in our faces it's amazing, and yet the ZH crowd gets suckered into the idea that the fed/tapering garbage.
Thank you again.
Thanks to Tyler and Andy Kessler for posting this article.
Eighty years of bond market history are presented here -- draw your own conclusions.
Any article that quotes the late, great Sidney Homer has my total respect.
Exactly LOP, cornered itself without the help of anyone. There is no way to win, at best he gets stagflation, that is shitty economy with quite a bit of inflation.
The only way the can get out is to have politicians to have an innoculation of Ron Paul serum, kick the lobbyists send the corporations to piss off and tell there will be NO pork, tell the people the truth that entitlements can not be paid. Close off-shore bases, cut expenditures and cut taxes. 1 year of excrushing pain and then .... a miracle happen... the economy rockets.
"1 year of excrushing pain and then .... a miracle happen... the economy rockets"
I agree with your ideas but your conclusion has you shitting more unicorns than an hour of squak box.
Sorry bud. You're half right.
You can gut the G parameter in the GDP equation and thus slash GDP, but nothing magical happens a year later.
Oil scarcity's destruction of net joules injected into the engine of global activity does not change via your attack of G.
There is no requirement that this whole matter of mankind have a happy ending. No rules say the future must be bright.
In fact, it's darker than it ever has been.
Oil price craters on demand and the arabs will pump more, driving the price further down. Arabs have a monthly Nut to meet to keep the locals happy, its gross dollars not $/barrel.
Nope.
It's joules/barrel, not $$/barrel. How many joules did it take to get that barrel out of the ground, compared to 80 years ago when you just loaded some lumber on a horse drawn wagon, gave the horse a few handfuls of hay, drove the wagon 10 miles, built a derrick 30 feet tall and drilled?
Now you build structures 30 **stories** tall, in sections, rail them to a coastline, assemble them, install a 30,000 horsepower marine engine, helicopter a crew out, drive the thing 6000 miles to a spot on the ocean, drill, and fail 3 times of every 4 attempts.
You think the energy in vs energy out ratio is improving? The net joules are what powers global activity. Not dollars.
I disagree because if you think about how much of that Government spending results in wasted energy that would be reclaimed by the economy, we'd see a boom without government in the way. Also, please remember that GDP describes the allocation of production, not the amount that is actually produced. If you want more wealth, you need more production, and if you want more production, you need more investment and savings. The reason why we are not seeing growth in overall wealth is because we are on full-tilt consumption mode and we're not investing enough in activities that actually increase production. If we divert government wasted resources into investment/R&D we'll see an increase in wealth.
Controlled market crash through tapering will cause a rotation into bonds at least until the smoke clears and the dip buying starts. The FED rigged it upwards with QE it is safe to assume though still to be proven. If they can rig it upwards they can rig it downwards also with tapering. But like anything else once the momentum picks up can they keep it from spiraling out of control?
Please, enough with the tapering. Congrats to CNBC for getting us to regurgitate and debate their bullshit.
Pretty much that.
WITH QE, in progress, we just got a 2.4% GDP number for Q1 2013, following Q4's 0.4%, and Q2 for this year is projected about 1.5% (and that's probably optimistic, given the Sequester didn't start til March 31).
That's WITH QE. That is pathetic GDP growth. Hideous. And deadly.
How in hell can they taper with 1.5% GDP numbers printing?
We shouldn't worry about GDP quantitatively, we should look at production more qualitatively. For example: Government waste increases GDP, yet is useless in terms of producing actual wealth.
So you think the stress tests done earlier in the year weren't are dry run to see if the banking system would hold up if they tapered off? You think Bernanke saying he is not showing up at the premier banker conference months ahead of time is not a signal that the FED plans to switch direction? Mind you that doesn't mean that the direction change is to taper but it is indicative of something bigger. You seem pretty apprehensive about bonds in general. If it is such bullshit you should be able to make a knockout case for why it is and stop the prattle in it's tracks.
Last time I checked the MSM is still bad mouthing the bond market and still fluffing the stock market. Rule of thumb in the new normal whatever they say do the opposite since that is what the 'inside information aka smart money' seems to be doing.
Do you think those stress tests were reality based?
Did they stress test those banks for a rise in interest rates?
No they were not, and no they did not. Since rates are not allowed to rise they should not be rising. They may settle the Yen down. Then this is all a non event. But if they don't, look the fuck out.
Ok but what about japan? Will their bond market crash be the trigger for US treasury yields to sink?
This depends on whether or not these savers run to gold or back to the very investment vehicles that have been screwing them over for the last 25 years...
when will people wake up and realize IT WAS JAPAN'S BOND MARKET CRASH THAT CAUSED OUR YIELDS TO RISE.
Absolutely. The Yen carry traders have a huge impact on our market.
Carry traders were spooked from jgb to the nikkei side of the boat this is true but the inexorable rise of the nikkei and s&p also caused an after effect on the bond market as late comers to the ferry rushed in so as not to miss the boat completely. They will all be swimming for shore if the bankers pull the plug. It's all one big screw job and the desired end is the volatility itself.
That is true, I am just waiting for both sides of the boat to realize the entire boat is sinking.
to me...as with all other analytical tools i prefer...i like simplicity. and for me here's Dr. Simpleton's approach. "What would the bankers want?" a recovery worthy of the name? yep. do we have it? no. Government spending that is something other than totally irresponsible? yep. do we have it? nope. a Fed that's seems like something other than a political exercise in expediency? yep. do we have it? nope. a "chastened Wall Street" that learned the lessons of Wall Street? yep. do we have it? nope. A media that acts like something other than a bunch of boileroom stock jobbing whackos? yep. do we have it? nope. i mean "what's sustainable here" and i look at this thing and say (other than the war effort that we are losing because of the you know who) "ABSOLUTELY NOTHING." i would argue...STRONGLY of course...that Uncle Sam gets an A+ for crisis management back in 2008...the Great Depression was averted (wow, is that the standard for success?!!!) but having said that "we might be on the verge of snatching a glorious defeat from the jaws of victory" here.
Crisis wasn't averted - it's still here, it's just being ignored. No growth until sanity returns.
Rate Hike!
Great article. Rates will come back down but I disagree (buzzsaw99) with the 5 year call. I think rates will move lower and stay there for a period of time but at some point the Fed will lose control and then it will be game, set, match. Over. I don't know if it will be 6 months or 2 years, but the end is out there.
And for the record. All this bullshit about easing QE. Never, ever going to happen. They can't unless they want to create an instant depression. They are trapped and they know it. When the bond vigilantes decide to and Japan, Russia, China, etc. decide they have had enough of this crap, then and only then will the printing press be taken away. These media articles about tapering are useless drivel. Not gonna happen.
Fed will lose control, this is just a rehersal. Just wait.
The fed has lost control. 85 bil a month indefinitely is anything but control.
I'm quite sure Ben can quit at any time he wants. *twitch*
Correction, the FED and the BOJ have lost control and right now they are both attempting to contain it. These are not small markets...$11T and $17T.
I don't think either of them knows what to do if each tacks on another 50bps in short order. Diversion, add to, taper....they will try ANYTHING once they feel it truly is getting out of hand.
It could easily happen right here, right now or they may be able to settle things down for a bit. Could go either way IMO.
But clearly they both have lost control of what they thought they had under control.
exactly, and I would love to know who threw that wrench into the machine that made it start smoking. My guess is China.
China has its own big mess on its hands. Its credit markets have been pushed to its limits and are having the same diminishing returns on credit expansion as ours is. China has its own diversion tactics at play (see N. Korea wind up toy).
Funny thing is European leaders are just happy to see markets go haywire other than their own. Soon this all will gel together into one big meltdown.
Well China is flattening the curve on purpose. When I see bankruptcies of SOEs and local gov entities, I will buy boat loads of good Chinese stocks. If China does some sort of privatization of SOEs or restructuring, Xi Jinping would become the next Deng Xiaoping.
For now, Yuan investment grade fixed income will do.
Yuan investment grade fixed income? Via what instruments, securities? How do manage FX?
i don't know. i think yields got too low relative to just about anythng else. As long as the economy has a pulse yields will fluctuate between 1 and 2.5%. You know, everybody was drinking the cool aid during the last couple of weeks. Bond holders closing positions around 1.65 was just an admission of "hey this was a great run, but, the economy is performing too well for this position to improve further." Of course, when I say "well", i mean than in a relative sense. So, I don't think Bernanke or anybody was involved or complicit. Merely a substitution, a change in preferences, a relative risk/reward allocation. 2.25 or so, IMO is a ceiling on the 10 year, despite CB shinanigans. The economy has to improve substantially before yields are going to take off. A couple more pieces of shitty data, and we will be back at sub-1.7 in no time.
Having said all that, if foreign bond holders start dumping that could provide all sorts of reasons for changing the thesis. And I'm all in agreement with that too. But, for now, just this post, I'm suggesting that for once the market was left free and unencumbered by CB intervention.
Well so far Bernanke was able to jawbone the Treasuries market, no more folks. The market has a life of its own, exactly when you think you have tamed the beast it comes back with a vengeance.
There were articles last year suggesting HFT was, at that point, 40% of bond market trading volume. And rising.
HFT doesn't have to care about macroeconomics. It hasn't in its dominance of equities.
The ugly truth is that HFT is more powerful even than the Fed.
Whilst I'm not in the yields are going up for good nor we're in a sustainable recovery, I will say that yields can back up for other reasons than growth expectations is well believed within the market.
I'm not a bond guy, but I agree with this assessment that the economy will not be improving and therefore bonds yields aren't going to continue upward for long. But here's the problem, and why central bank intervention is screwing everything up: if Bernanke actually succeeds in stimulating the economy back to a self-sustaining machine, and the big bonds guys start selling and going short bonds in response to that, how are the banks and the US gov't going to avoid default as rates rise? And if Bernanke fails at giving the economy wings so it can fly all on its own, which is inevitable in my opinion because the whole idea of inflating bubbles has already been proven idiotic, not to mention this is a structural problem because all our manufacturing jobs are in China, then bond yields will stay low for a long time but they will eventually skyrocket because the debt servicing costs will bankrupt the US and bonds will be dumped in response (when it becomes real). That's why this is a no win scenario in the long-term for bonds. The issue, of course, is in the timing. They could certainly stay low for a long time before everything unravels.
This monetary policy is so insane it's like some kind of Twilight Zone where WAY too many people have taken a bite from Bernanke's apple. Even if it were theoritically possible that he could succeed, what is the window he has to get it done where the economy improves but the US doesn't rack up so much debt that it won't be able to service it when the inevitable rate rise happens? Personally, I think that theoritical window has already closed. So here's the problem that must nip at the ear of the big bond guys when they're sleeping: when will the random spike in yields like we're seeing now be the final spike in yields that keeps going and never gets bought up? Same problem with equities. Since this whole charade has no chance of actually succeeding, when do the dips come that never get bought up? Everyone is playing the same game of chicken. But all Bernanke has to do to keep it going is reassure everyone he has no intention of tapering anytime soon. Apparently, he decided it was time to cool things off and see what the reaction would be. Now he knows if the day ever comes when he actually tapers and unwinds, all his precious bubbles are going to burst. Normally, I would say stocks will burst first and everyone will run to bonds, but since everything is correlated to the whims of one bearded man, maybe it's more likely everyone runs to cash. And maybe the tiniest portion of that cash chases precious metals. I don't know if that's how it will play out, but I suspect paper will chase metal at some point. But it's probably wise to allocate properly in case they change the rules. If the fiat end game actually happens you only need a certain percentage to protect yourself.
Bond yields can go up due to risk aversion, no hot economy is required. This is to be expected at these extreme levels for yields. Bernanke can drag back a little, but he has to follow yields. Any substantial divergence means panic.
Interest rates have risen because of Kuroda's stupidity. When you tell the market your goal is 2% inflation when the market has 10 yr JGB's at 0.5% and a shit-load of 10 yr JGB's, the stupid market realizes all their faith based risk-free highly leveraged investment strategies might get CORZINED.
This is the first step in pulling the curtain from the wizard for all the stupid people playing musical chairs with the central bankers. Many are going to get CORZINED, because the central bankers have moved everyone to one side of the boat. As an earlier article stated, this market requires no economic/financial analysis, because central bankers have disconnected these markets from reality.
Per Reuters, Gross just upped US Ts from 33% to 39% (18%+ increase) in "total return" fund. Also, Gross just delinked several high octane stockplus funds from this total return fund, re-linking instead to unconstrained bond fund, affectionately called "absolute return." Tell us why old wise one.
And the wild card is what's called "randomness".My own feeling is that it is a coming war.The back breaker for any budget.(if there ever is one)
If article and opinion is right that rates will retreat, then adding bonds here may make sense. Today, bought a 7yr Muni GA Power Rev AA/AA- for 3.7%.