The Most Unloved Rally Is In Bonds

Tyler Durden's picture


Submitted by Scotiabank's Guy Haselmann,

Most market pundits have predicted higher bond yields (for months), yet unloved global fixed income securities have traded well all year.  Even after the dovish FOMC reiterated its intent to maintain a highly-accommodative stance, bonds have stayed resilient. As a matter of fact, US junk bonds (aka high-yield) hit an all-time low yield this month, as did the sovereign debt of several European countries.  The spread between US high-yield and high-grade is approaching its narrowest all-time gap set in June 2007.

  • There are many scenarios for how the economy and financial markets will respond as the FOMC pivots toward a more ‘normal policy’.  In considering all the potential outcomes, I remain bullish on long dated Treasuries for the reasons outlined in earlier notes.  I expect a new low by the end of the summer and a sub 3% 30- year by the end of the year.

Despite the well-anticipated dovish FOMC message, Fed-head Yellen generated disquieting market unease. There could be several reasons for this.  It was certainly strange to hear the Fed Chair declare that stocks are fairly valued.  At best, equity valuations are ambiguous.  At worst, there are plenty of metrics to suggest bubble-like conditions, and a few indicating the most expensive levels in history.   

The main cause of market jitteriness might be that investors are beginning to sense the ‘time-inconsistency’ aspects of Fed policy.  Much has been written about how overly accommodative monetary policy aimed at short term benefits result in more unstable longer-term outcomes and have triggered repeated boom to bust cycles.  Under the current experimental policy it could be argued that the FOMC has either failed to learn from history or has the hubris to believe they can contain the fallout.

There is a less obvious ‘time-inconsistent’ aspect worth mentioning.  My paper “2014 and Beyond” stated that “holding interest rates at zero for a prolonged period is actually counter-productive to the Fed’s efforts of achieving either of its dual mandate.  This is because increasing productivity through modernization typically exposes redundancies: it allows firms to lay-off workers, while the improvement in competitiveness allows firms to drop prices.”

During the 6 years (and counting) of ZIRP (zero interest rate policy) the amount of corporate debt outstanding has more than tripled.  The proceeds have not gone into capital investment.  Rather, corporations have prudently chosen to engage in debt-financed share buybacks or the modernization of existing plant and equipment.  The short term impacts are as mentioned and counter-productive to the Fed’s mandates.  However, before I am labeled a Luddite, I admit that this is only half the story.  The other half of the story is the beneficial long-run aspects which forms the basis of one of the Fed’s time-inconsistency quandaries.

Plant modernization increases productivity.  It is widely acknowledged that jobs are more frequently being replaced by computers and robots.  Hewlett Packard, for instance, replaced 9000 people who were overseeing its computer systems with another set of computers to oversee those computers.   In the long run, however, the technological revolution has great benefits to the globe, providing almost unlimited access to information and education.  Such access will foment creativity, innovation and ever improving productivity.  (It also decreases inflation over time.)

The potential is great, making it easier to be bullish on the US in the long run (which I am).  The problem is that the benefits will take place over a long period of time, while the negative consequences are more immediate. Too many people are losing jobs to technology today without receiving retraining or the proper skill development necessary to evolve with the changing economic landscape.

Fed policies are accelerating this process and may, therefore, be counter-productive on several fronts.  The Fed tools being used are too limiting and have unintended consequences.  The latest tool appears to be trying to ‘buy time’ in the hope that new technologies will ‘catch-up’.   In the meantime, financial risks are aggregating.

BTW, why is the Fed so desperate to increase consumer inflation?  What does achieving optimal inflation look like?  How will they recognize it when they see it?

“What we know about the global financial crisis is that we don’t know very much.” – Paul Samuelson

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Fri, 06/27/2014 - 09:11 | 4901784 i_call_you_my_base
i_call_you_my_base's picture

Globalist banker horseshit.

Fri, 06/27/2014 - 09:14 | 4901796 svayambhu108
svayambhu108's picture

Your mean with the manure

Fri, 06/27/2014 - 09:22 | 4901843 Aussiekiwi
Aussiekiwi's picture

Can't really top that for accuracy

Fri, 06/27/2014 - 09:13 | 4901788 knukles
knukles's picture

The global economy stinks in the face of unprecedented monetary and fiscal stimulus.
Liquidity Trap
Rates are low and will fall further
Any talk of raising rates is premature... altho raising money rates, paradoxically would help the economy by injecting TRILLIONS into the pockets of savers
If they have any savings left.

Lock up your income.  We're in a Japanese model.

Fri, 06/27/2014 - 09:13 | 4901797 SheepDog-One
SheepDog-One's picture

The bond guys are always the ones who get it closest to right, so 'pundits' you can keep flailing your arms about rate increase nonsense but you'll never see it.

Fri, 06/27/2014 - 13:19 | 4902784 Redneck Hippy
Redneck Hippy's picture

Bonds will keep going up, interest rates will keep falling, since Fed is tapering, but BOJ, Draghi, and China are all easing.  How does the interest rate differential between JGBs and Treasuries make any sense?  With that sort of arbitrage available, interest rates can't move higher no matter what the economy or the Fed does.

Fri, 06/27/2014 - 09:14 | 4901801 nightshiftsucks
nightshiftsucks's picture

"The potential is great, making it easier to be bullish on the US in the long run "  Is this guy a fucking idiot ?

Fri, 06/27/2014 - 09:17 | 4901814 NoDebt
NoDebt's picture

Well, he's smart enough to get paid for writing this crap, so he's got that going for him.

Fri, 06/27/2014 - 09:25 | 4901853 buzzsaw99
buzzsaw99's picture

Well, people are dumb enough to pay him for writing this crap, so he's got that going for him.

fixed it

Fri, 06/27/2014 - 09:18 | 4901824 SheepDog-One
SheepDog-One's picture

Yea 'never been more bullish on the US long run'...gee is that before or after the dollar is turnd to fire kindling, which is happening rapidly now?

Fri, 06/27/2014 - 09:15 | 4901806 DarAdder
DarAdder's picture

I interrupt this thread to bring you news of a bank run in Bulgaria.


FIB bank.


My friend is standing in line to get his money out. He is sending me photos of the queue.


Fri, 06/27/2014 - 09:20 | 4901837 SheepDog-One
SheepDog-One's picture

Must.....Trust.....Central Bankster.......Crooks....

Fri, 06/27/2014 - 09:39 | 4901899 headhunt
headhunt's picture

"Must.....Trust.....Central Bankster.......Crooks......." he said as the 'Central Banksters' pissed kryptonite on him

Fri, 06/27/2014 - 09:16 | 4901808 SheepDog-One
SheepDog-One's picture

Since the article brought up HP, I'll tell you I was never as pissed off as when I got this piece of crap HP computer from the IT Dept.....worst piece of junk ever.

Fri, 06/27/2014 - 09:19 | 4901831 i_call_you_my_base
i_call_you_my_base's picture

The HP Compaqs are among the worst computers ever made.

Fri, 06/27/2014 - 09:23 | 4901847 SheepDog-One
SheepDog-One's picture

Don't I know it first hand.....and the real pisser is this bullshit job I have now won't allow me to use my Airbook which is 100X the HP computer I have to use with these clowns.

Fri, 06/27/2014 - 09:16 | 4901809 NoDebt
NoDebt's picture

"The problem is that the benefits will take place over a long period of time, while the negative consequences are more immediate."

Don't worry, the government will make sure there is plenty of pain both in the short AND long term, regardless of what happens in the technology space.  And you can take that fact back to the bank that sent you.

Fri, 06/27/2014 - 09:23 | 4901810 buzzsaw99
buzzsaw99's picture

I remain bullish on long dated Treasuries for the reasons outlined in earlier notes. I expect a new low by the end of the summer and a sub 3% 30- year by the end of the year...

He is out of his mind. I am the biggest bond bull on the planet but there is no way in hell he can predict near term shit like that with any degree of confidence. The trend is your friend but don't bet the farm on day to day movements.

Fri, 06/27/2014 - 09:28 | 4901822 Dr. Engali
Dr. Engali's picture

"Too many people are losing jobs to technology today without receiving retraining or the proper skill development necessary to evolve with the changing economic landscape."


 This is such a bull shit statement, some people just aren't meant to be 'retrained'. For some people their sweat and their labor is all they have, not that that's a bad thing. Hard work is very noble, but this economy and what is to come sucks for them. This guy would have them loaded up with student debt and no more marketable than the next guy who just lost his job to technology  BTW....I thought this was an article about bawnds, not some grand delusion of the utopia to come  because evrybody has been replaced by a robot.

Fri, 06/27/2014 - 09:46 | 4901931 NoDebt
NoDebt's picture

Was watching an episode of "Modern Marvels" the other day about building America's road system.  120 years ago they were doing it with gangs of workers with shovels, horse-drawn implements, etc.  100 years ago they were doing it with gangs of workers with shovels, TRUCKS, etc.  And it went more mechanized from there.

Made me wonder... what happened to all the horses?  I mean, after we no longer needed them as "beasts of burden" the population of horses went way down in the US.  

Get it?  Thanks for all your labor, now off to the glue factory with you.  They didn't even TRY to retrain those horses for other careers or anything.


Fri, 06/27/2014 - 10:00 | 4901999 CrashisOptimistic
CrashisOptimistic's picture

I think there are govt funded horse vocational tech colleges where a horse can learn to become a hair stylist.

Fri, 06/27/2014 - 09:20 | 4901835 RiskyBidness
RiskyBidness's picture

Queen Yellen is fucked!!  She will be slayed when this house of stupidity collapses.  Meanwhile, BTFD!!

Fri, 06/27/2014 - 09:22 | 4901842 DarAdder
DarAdder's picture

My friend says the police have arrived and the bank is closed. But he got his money out.


Now he is going to the next bank to get more money out.


I think by that he means a different Bulgaian bank. He is afraid they will go down like dominoes.


Well I can cut'n'paste from Viber:

[Friday, 27 June 2014 14:09] : Made transfer
[Friday, 27 June 2014 14:09] : They closed the bank police arrived
[Friday, 27 June 2014 14:09] : Going next bank now
[Friday, 27 June 2014 14:13] : 800 million paid out today

Fri, 06/27/2014 - 09:43 | 4901920 p00k1e
p00k1e's picture

Thanks for the Bank Run updates.  Keep 'em coming. 

Fri, 06/27/2014 - 09:27 | 4901863 SethDealer
SethDealer's picture

we got bonds coming out the ass

Fri, 06/27/2014 - 09:28 | 4901866 OC Sure
OC Sure's picture

This is exactly what achieving the optimal inflation of counterfeit looks like. Effect, be-cause: 

Fri, 06/27/2014 - 09:31 | 4901875 DarAdder
DarAdder's picture

Apparently all the banks in Sofia are closed.

I can post photos of the queue outside the FIB bank if Tyler permits.


Fri, 06/27/2014 - 09:36 | 4901889 The_Ungrateful_Yid
The_Ungrateful_Yid's picture

Fuck you Fed...FUCK YOU

Fri, 06/27/2014 - 09:50 | 4901956 flyonmywall
flyonmywall's picture

Sooner, rather than later, Yellen might actually have to make some decisions instead of following a script.

When the S&P drops by 500, and the Dow drops by 4000 over a couple of weeks, and no amount of QE will lift it, whacha gonna do Madame Chairwoman??

You gonna need a bigger crane to lift the market out of that hole, so the market will believe !!!


Fri, 06/27/2014 - 09:51 | 4901967 DarAdder
DarAdder's picture

Bulgarian bank run latest:

[Friday, 27 June 2014 14:34] Him: All banks closed
[Friday, 27 June 2014 14:45] Me : Well it's the time of day for them to close
[Friday, 27 June 2014 14:45] Him: Normal closing time 10pm
[Friday, 27 June 2014 14:45] Me : Oh really
[Friday, 27 June 2014 14:45] Him: Or 8pm
[Friday, 27 June 2014 14:46] Him: And they open weekends normally too
[Friday, 27 June 2014 14:46] Him: But all banks closed till Monday now
[Friday, 27 June 2014 14:46] Him: Maybe announcement from government at weekend
[Friday, 27 June 2014 14:46] Me : HOw do you konw that? Is it on the local news?
[Friday, 27 June 2014 14:46] Him: My Bulgarian friends keep me updated
[Friday, 27 June 2014 14:47] Him: They had money there too

Fri, 06/27/2014 - 10:02 | 4902008 Flakmeister
Flakmeister's picture

The bond shorts must feel like the new pretty boy in a turkish prison...

Fri, 06/27/2014 - 10:07 | 4902034 QQQBall
QQQBall's picture

Good article. Thanks

Fri, 06/27/2014 - 10:16 | 4902075 LawsofPhysics
LawsofPhysics's picture

Well, when you announce negative interest rates will be forced a 2% return looks pretty fucking good.  Any questions?

Fri, 06/27/2014 - 11:50 | 4902457 Cruel Aid
Cruel Aid's picture

Yea and I am liking the new gasoline prices lately.

Beats riding a horse to work downtown.

Fri, 06/27/2014 - 10:42 | 4902169 Seal
Seal's picture

the truth being that the excessive increase of anything often causes a reaction in the opposite direction; and this is the case not only in the seasons and in vegetable and animal life, but above all in forms of government. PLATO

Fri, 06/27/2014 - 11:57 | 4902491 khaproperty
khaproperty's picture

Most notebanks - espacially Fed and EZB - made the mistake to think it could make policy similar to politicians.

No way. It´s nor money"policy" nor policy at all.

They follow the reality. But they are not able to change it.

Not for the country, the people - only for some cronies to fill up their own pockets.

And they are able to cause damage without end.

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