How Bank Of America Explains The Treasury Bid: "Cold Weather"

Tyler Durden's picture

Bank of America, whose stubborn, and quite abysmal "short Treasurys" call, has been one of the worst sellside trade recos in recent history and cost investors countless losses, has an update. Only instead of doing a mea culpa and finally admitting it was wrong, the bailed out bank has decided to provide humor instead. Namely it too has joined the ranks of countless others providing an "explanation" (or in its case, an "excuse") for the relentless bond bid. The punchline: "cold weather."


Idiocy aside, here is another "Treasury buying explanation", one far more non-insane, this time from Louis-Vincent Gave

Why Are Bond Yields So Low?


As long as men continue to age, they will probably complain that “things were better in their day” and that “the world is going to hell in a hand-basket”. Ignore for a moment that the proportion of undernourished people fell from 23% of the developing world in 1990-92 to under 15% in 2010-2012, that more than two billion people gained access to improved sources of drinking water in the past decade, and that never in history have so many people across the globe lived so comfortably—as far as financial markets are concerned, the ‘old-timers’ may have a point.


Indeed, anyone who started their financial career in the late 1990s has had to deal with the Asian Crisis, the Russian default and Long Term Capital Management failure, the Technology, Media, Telecom (TMT) bubble and collapse, the subprime bust and global financial crisis, the eurozone crisis and the past 12 months’ bond market taper tantrum and emerging market wobbles. In other words, there have been plenty of opportunities to catch the volatility on the wrong side. And these recurrent punches in the gut (combined with the recent violent rotation from growth stocks to value stocks or the fall in the renminbi), may explain why so many investors continue to seek the shelter of the long-dated treasuries, bunds and Japanese Government Bonds, despite these instruments apparent lack of value. Simply put, after almost two decades of repeated financial crisis, investors today do not have their forebears’ tolerance for pain. And so the old timers may be right: today’s young people are wimps, for both theoretical and practical reasons:

  • An inherent level of systemic risk? Most people intuitively feel Karl Popper’s observation that: “In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable”. In other words, suppress risk somewhere and it comes back with a vengeance to bite you on the derriere at some later date. Look at 2008 as an example: we cut up credit-issuing risk into tiny parcels and distributed it across the system through securitization, only to see the banks take on a lot more leverage and ultimately sink their balance sheets on instruments they failed to understand. Hyman Minsky summed up this inherent contradiction well when he stated that “stability breeds instability”. In other words, the more stable a thing is, the temptation rises to pile on leverage, which makes that “something” more unstable on the back end.
  • The notion of Anti-Fragile: the above brings us to the Nassim Taleb notion of “anti-fragile”: just as a parent who overly cocoons a child prepares that offspring poorly to function in the wider world, so policy-makers intent on cushioning the private sector from every shock in the economic cycle are a doing the overall system a massive disservice. By preventing the build-up of immunity, or the ability to thrive in crisis (i.e., anti-fragility), policymakers sow the seed for a greater  crisis down the road (hence the repeated cycle of crises).
  • Lay the blame on zero interest-rate policy (ZIRP): following on the above, not only does ZIRP allow the survival of zombie companies (which drags down the returns for everyone) but it most certainly affects investors’ behavior. Firstly, by encouraging  banks to play the yield curve and buy long bonds, rather than go out and lend. Secondly, because almost all investors hold part of their assets in equities and part in cash or fixed incomes. And in a world in which fixed income instruments yield close to nothing, the tolerance for pain in other asset classes probably diminishes all the more. Indeed, if an investor is guaranteed a 7% coupon on his fixed income portfolio, then a mild sell-off in equity markets can be easily dismissed. But drop the yield on the bond portfolio to 2.5% and all of a sudden, the slightest drop in equity markets risks pushing the overall returns of the total portfolio into the red... Unless, of course, one holds much more fixed income instruments than equities. Paradoxically, that growing population cohort which seeks a guaranteed level of annual income faces the perverse reality that low bond yields force an even greater allocation of their savings into bonds! And this quandary is further amplified by the last point.
  • The changing structure of savings: a generation ago, employees of large corporations would typically be enrolled in that company’s “defined benefits” pension plan. This meant that most salary-men, at least in the US, could look forward to a fixed monthly sum upon retirement, regardless of a) how long they lived for and b) what the market did. At that time, the overall behavior of financial markets was the concern of the pension fund’s managers who, if they were wise, could average up in bear markets and take some gains off the table when markets got hot; in other words, stomach the volatility of financial markets (backstopped by their companies’ long-term earning power) for the long-term benefit of their plan holders. But today, following the evolution of most pension plans away from “defined benefits” to “defined contribution”, the average pensioner’s relationship to his pension has been turned on its head. Today, the average saver receives a monthly statement explaining how much he has saved; and any dip in that amount triggers sentiments of panic and fears that a looming retirement may not be well provided for. Combine that fear with rises in healthcare and college costs (two costs that older folks have to worry about) that, over the past decade, have typically continued to outstrip inflation and any dip in the market is more likely to trigger a sentiment of panic, and rapid shift into bonds, then a willingness to ‘buy on the dip’ (see chart below).

Putting it all together, it seems hard to find one factor that explains the low level of yields. In our view, the ageing of our societies, ZIRP and the low level of rates, the shift from defined benefits to defined contributions, the activism of policy-makers (who, by attempting to cushion the volatility of the economic cycle more often than not end up increasing the volatility of financial markets down the road)... have all had a hand in keeping interest rates low. And if that is the case, then it will probably take a marked change in some of the above factor to trigger a significant rise in bond yields?

* * *

What do you mean "it's difficult" - Bank of America just 'splained: snow in the winter!

QE... oh yes, and D

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bobby02's picture

So, not only do they fail to grasp the one real factor, i.e., a change in the term structure, they identify four factors that are not only wrong, but are not "new" at all, and thus cannot be the basis for a ST trade. Bootiful.

fonzannoon's picture

For anyone who cares aboout this stuff, CNBC just did a segment on stock vs flow and, similar to DB yesterday, are doing an end zone celebration that stock won the day, and why the fed will be able to continue zirp 4eva even when the fed has exited QE.  Liesman kept hammering the point home, as if he was talking to ZH.

Everybodys All American's picture

... the fed will be able to continue zirp 4eva even when the fed has exited QE.

I seriously doubt these people have any understanding of the bond market if they actually believe that without the Fed holding down the rise of interest rates that things will play out that way.


fonzannoon's picture

They are asserting that the fed can hold down the rise in rates with the combination of the amount of UST's they own, and the banks etc needing to hold a shitload of them for collateral purposes. The flow is stopping and they control a substantial portion of the stock, enough to dictate rates. It makes a lot of sense. I'm not even including foreigners who keep buying moar and moar (yes even outside of Belgium)

OC Sure's picture

"…any important piece of news given out between the closing of one market and the opening of another is usually in harmony with the line of least resistance. The trend has been established before the news is published, and in bull markets bear items are ignored and bull news exaggerated, and vice versa." 

- Jesse Livermore

Mabussur's picture

It's amazing that the whole charade is still going. You gotta hand it to em financial fucks shuffling wind. I would have never thought that it could go for so long. Cold weather.... are people really that fucking stupid ?

Ignatius's picture

Maybe it's a sly way of normalizing the "climate change" scam by injecting weather into everything.

They really are pushing the carbon credit scam so maybe...

quasimodo's picture

Yes, in fact most people really are that fucking stupid. 



Atlantis Consigliore's picture

FREDOS The  Advisors:   Im Smart and I want respect.......

medium giraffe's picture

"I got so distracted by the teachings of Ayn Rand that I could hardly think-- and then my test came back positive (a mistake, it turned out). I am so unspiritual sometimes!  Anyway, I hope the cat doesn't have kittens this week."

Courtesy excuse-o-mat. -


Yancey Ward's picture

Canandian bonds hit -1000000%, so it must be the cold weather.

cowdiddly's picture

Who would even listen to this idiot bank. They can't make any money unless its money laudering, issuing fraudulent mortgages or some other criminal activity. The fact that Bank of America is still a going concern is a glaring example of what is wrong with a controlled economy. Nothing but dead weight drag.

wagthetails's picture

well if you are getting advice form BOA in the first place, i'm sure you'd believe this as well.  why not.

Zirpedge's picture

I just keep plugging every loose dollar I have into my MyRA. BoA doesn't understand the security of Tresuries issued by the greatest nation on the face of the earth. I'll buy more and continue even if rates go negative because Obama. 

MontgomeryScott's picture

When I was a kid, I got a job where my employer used Bank of America as its' payroll account. I had a branch nearby, and went in every week to cash my check. It was great... for about 4 weeks. One day, they told me that they couldn't cash my check, because I didn't have an account with them. Being young and stupid, I was coerced in to opening one (hell, what did I know?).

For another 3 weeks, I went in every week and cashed my check, and everything was fine. On the FOURTH week after, they told me that I couldn't cash the check because it wasn't drawn on an account at THIS BRANCH... I stared at the teller, and looked at the check. Sure enough, it said 'Bank of America' I looked at my account passbook, and it said 'Bank of America'. I said, "Give me all my money back, please." I was told that I couldn't HAVE all my money back, that it would take up to two weeks to 'close the account'.

I stepped outside, and walked over to the ATM machine, poking in the card and my number, and hit 'withdrawl' for the amount in my account. It responded with 'insufficient funds available'. I then tried again, subtracting $5, and it gave me my money (except for the $5.00). I never gave it a second thought, and have never been back. This was 31 years ago. Shortly thereafter, I heard that the Japanese bought controlling interest in this 'America' bank, and I laughed at the thought of them hoarding my $5.00, as I walked out of my credit union branch.


They'll tell you Black is really White; the Moon is just the Sun at night; and when you walk through Golden halls, you get to keep the gold that falls...

Bond yields are down because it snowed in the winter, and they'll be down later because it is going to be hot in the summer.



Colonel Klink's picture

Because Bankruptcy of America Muppet Looting is such a fine purveyor of honest and intelligent business assessment.  If they told me PMs were a good investment, I'd have to decide for myself and see if somehow someone managed to turn lead into gold.

FUCK BoAML!  Pull your business from the top 10 large TARP taking banks.  Do business with a local bank or credit union.