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The Name Is Bond, Long Bond
Submitted by Shane Obata from Triggers
The Name Is Bond, Long Bond
In early May of 2013, I came across a presentation by David Rosenberg called “Bernanke: The Wizard of Potemkin”.
The whole thing is great but there was one slide in particular that caught my eye…
Rule #9 is especially interesting; it’s the ultimate contrarian suggestion.
Why should you care?
Because hardly anyone expects US Treasuries to outperform in 2015… and that’s exactly why they might.
In the following analysis, we’ll look at 5 reasons why the long bond might be the best trade of next year.
1) When all the experts and forecasts agree…
First, let’s take a look at two recent polls by Reuters.
“the latest poll showed that…24 of 43 economists polled said the Fed will likely start raising short-term interest rates in June of next year. Seven expected an earlier start, while 11 believed the first rise will come in September or later”.
“14 of 19 primary dealers said they expect the first rate hike by June 2015”.
In other words, the consensus is that rates will rise in 2015.
But let’s not forget that market participants have been expecting this for some time.
The following chart shows that the idea that “the Fed is going to raise rates in the near future” has been consistently wrong since 2009.
We’ll see if the trend continues in 2015…
Moreover, according to the Barron’s Big Money Poll, almost all American money managers have a negative outlook for Treasuries. The succeeding image demonstrates that 91% of respondents are bearish on US Treasuries.
It’s the perfect setup for contrarian investors.
Not to mention the fact that comparable assets don’t look so hot…
2) Relative value…
Why own US Treasuries if rates are already so low?
In comparison to other “safe haven” assets – such as German and Japanese bonds – USTs actually look pretty good. The next diagram exhibits 30 year government bond yields for: the US (orange), Germany (green), and Japan (yellow).
As you can see, the US’s 30 year yield is 78.5% higher than Germany’s and 113.3% higher than Japan’s. If there’s a flight to safety then it’s likely that US Treasury bonds will see a lot of demand.
Especially if fear returns to the markets…
3) Risk off…
The world’s central banks continue to keep rates low and to expand their balance sheets. As a result, 2015 could be a good year for risk assets.
That said, what if it’s not?
From the high on September 18th, 2014 to the low on October 15th, 2014, the $SPY – the SPDR S&P 500 ETF – fell by 9.87%.
During that same period of time, from the low to the high, $TLT – the iShares 20+ year Treasury bond ETF – rose by 10.39%.
The ensuing figure displays that when investors are fearful, they often look to US Treasury Bonds (USTs) for “safety”.
If the S&P 500 sells off in 2015 then it’s likely that USTs will rally.
What’s more is that, as we noted here, world growth is trending down.
The subsequent graph confirms that world GDP growth peaked in late 2009.
If this persists then it’s likely that investors will move their money from risky assets – such as emerging markets stocks and bonds – to “safe” assets – such as USTs.
But will there be enough supply?..
4) Limited supply…
The Fed now owns more than 45% of all outstanding 20+ year Treasuries; these securities are “off the market”.
Said another way, they’re not for sale.
In the same light, the Federal deficit is shrinking. The following chart shows that it’s been in decline since 2009.
If the deficit continues to fall then the Treasury won’t have to issue as much debt. This, in turn, will lead to a lower rate of supply of USTs. In sum, there may not be enough US Treasury bonds to go around.
But is that what the price action is telling us?..
5) Bullish technicals…
The monthly chart
The succeeding image displays that $TLT is below its late 2008 and mid 2012 peaks.
The monthly W%R is below -20; however, it appears to be turning up – which is positive.
The weekly chart
The next diagram exhibits that $TLT has been rising since late 2013.
Failing to reach -80 in the last few downturns, the W%R is indicating a positive trend.
Daily chart
The ensuing figure displays that $TLT has made a base of support at ~$118. Furthermore, an up wave that’s identical to the 2014-07-03 to 2014-08-28 rally could see the ETF move up above $128 by 2015-01-15.
The daily W%R is above -20 which indicates that $TLT could be in for more gains.
Upside levels to watch: $123.15, ~$128, ~$130.
Downside levels to watch: ~$118, ~$116.
* * *
In conclusion…
There are numerous reasons why US Treasury bonds could be in for a big 2015.
Don’t believe me? Just ask Guy Haselmann.
A friend once told me that he “saw many traders get carried out in body bags trying to sell Japanese Government Bonds”.
It’s possible that the same fate may await those who try to sell USTs.
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need EU and or ECB to start QE to drive their rates into the hell hole and take pressure off US bond yields .. or really the USA is going to be stuck in a low yield glut which incentivizes banks to NOT lend for shyt.
http://www.hedgeaccordingly.com
Taxes and other fees imposed by local and state governments typically represent about 10 percent of your bill.
Negative interest rate 30 year Bond, here we come :-)
PS Why do you think we, the Fed's, are suppressing the price of gold via an endless supply of shorted Gold Futures? All alternatives to our worthless promises must be blocked.
Keep stackin bitches, the drummer boy has gone home and drank the whiskey.
As a rule, I don't invest in insolvent entities...EVER!!!
In 2016, when President Obama is set to hand over the keys to Hillary, we will all recall his MyRA program and how it saved the millenial generation from the financial oblivion brought by conservatards and their shiney metal trinkets. I'm no millenial, but I do know a savy financial plan when I see it, I started stacking before rates dipped and just kept stacking because the trend was hot.
All you need to know:
Cash,... Bonds,... Gold,...
I would like to see cash (USD) win over bonds in 2015, that would be good for everyone.
You should go all in on that MyRA, bro, for realz....
We MyRA'd some folks into a solid financial plan. The best investment advise often comes from time spent on the golf course.
Double post, moderators please delete this for clarity.
Deleted.
Make it so Mr Crusher!
Mr Spock. Bring along 2 members of the Security detail
They're dead, Jim
so we go 'long' lending out money to a hopelessly bankrupt, morally decripit institution as an investment strategy? we loan this money at negative interst rates, hoping not to be the bagholder when the inevitable defaults happen? no thanks, Ill leave that to the guys who can conjure money out of thin air and buy them, I actually have to work for my money, and im not loaning it to the govt for return free risk
Similar to what I was thinking so again:
As a rule, I don't invest in insolvent entities...EVER!!!
Yield free risk.
US Treasury Bond: Do you expect me to go up in price?
Gold: No, Mr. Bond, I expect you to die!
Logged in to congratulate you for being clever
Weren't UST supposed to underperform in 2014?
damn
Long what!? BONDS?! Not long Gold?!
US treasuries will be the only safe place to park money for awhile as the EU, Russia and Asia implode.
So go long Boeing, Lockheed, Raytheon, Northrup Grummen, Ball Aerospace?
While I'm at it... Defense ETFs: PPA, ITA XAR.
Well Bammy's next SecDef wanted to initiate Pre-Emptive strikes on North Korea, FFS.
The guy's a worse warmonger than any of his predecessors, by a long way.
Well, LBJ did a fine job in Vietnam.
(No, for the fun with a few of you young guys, Nixon was the one brought the troops home.... just so you know that what you were taught in the state liberal schools is a buncha shit.)
I refuse to argue with you as long as you simply quote facts!
TRANSLATION:
1. Markets tend to return to mean over time. UNMANIPULATED MARKETS ~ THAT IS
2. Excesses in one direction will lead to an opposite excess in the other direction. UNLESS THE 24/7 MONEY PRINTING + LEVERAGE DYNAMIC IS PRESENT
3. There are no new eras - excesses are never permanent UNLESS SUCH EXCESSES ARE A FUNCTION OF CENTRAL BANK BALANCE SHEETS
4. Exponentially rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways. INSTEAD ~ THEY PREDICTABLY GO ONE SIGMA BEYOND ACCUMULATED STOP~LOSS LEVELS, WHEREBY, THEY PROMPTLY 'CORRECT' AT 2am IN ASIAN MARKET TRADING ON HOLIDAY WEEKENDS.
5. The public buys most at the top and the least at the bottom. BECAUSE ALL THEIR MONEY IS TIED UP IN 401K'S, WHEREBY A 1000% PENALTY WOULD RESULT IN EARLY WITHDRAWL.
6. Fear and greed are stronger than long term resolve. BUT STUPIDITY TRUMPS THEM BOTH.
7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue chip names. SPX & VIX COMPRISE 100% OF THAT HANDFUL
8. Bear markets have three stages - i.) sharp down ii) reflexive rebound, and iii) a drawn out fundamental downtrend. AFTER THAT ~ THE CURRENCY COLLAPSES, WHICH ESSENTIALLY NULLIFIES THE AFOREMENTIONED CUTE WAVY LINES.
9. When all experts and forecasts agree, something else is going to happen. THE EXPERTS & FORECASTERS JOIN THE RANKS OF THE UNEMPLOYED, AT A LOWER SKILL LEVEL
10. Bull markets are more fun than bear markets. FOR PAPER JOCKEYS
yeah, he give credence to market forces when there is no market
An ear of corn averages 800 kernels in 16 rows.
Then sir, I suppose it to you that the average corn row has 50 kernels, and therefore would make quite the complex operating system.
Hah ha ha ha ha
Long bonds were supposed to under-preform for the last 5 consecutive years running. Re: Consensus forecasts, Wall Street recommendations, Mutual Fund (Bond) cash levels, money printing, etc., etc., etc.
One last time.
We're in a Liquidity Trap, same as the Japanese have been for the last 40 fucking years.
Y'all can print as much as you like, all the fiscal stimulus you like, it ain't done, ain't doing and won't do shit
To wit: The whole bunch of folks here on the Hedge say the world's coming to an end. Or an approximation thereof. Meaning nothing's worked.
(Take a look at Japanese stock and bond yields since the 70's..... Most instructional)
Why? Because a Liquidity Trap is a Monetary Phenomenon Caused by Non-Monetary Conditions.
Anybody here see a major restructuring of the system?
Me neither.
Rates are going to be stable around these levels or go down further, longer term.
I'd advise locking in long term income and bar belling it with PM's
Treasuries (long) this year are up some 17% or so, S&P 15% or so and gold, down 4% or so.
Which side the trade's worked?
The Treasuries
Gonna be the same next year and etc,
Now I'd be One Happy Camper if the Gold Side Worked, too.
the consensus is for bonds yields to rmeain low (because of ECB/BOJ) ect .. is the market is massively long bonds..
The ZH people are right in that people are not long real assets (gold/silver) they are the out liers until we get a shake up in one Govt market (re Japan).. then the scramble for the real asset will come quick..
So good luck with no interest bonds that carry huge devaluation risk .. the mutual/pension funds will wake up one day, they need to pay out more as the number of retiring people increase and income is reducing with stable population.. Rolling into zero cpn bonds aint going to work..
Wall Street is never long gold or silver. Wall street never uses gold or silver as collateral either.
THEY USE MONEY.
Start with the MONEY first and go from there...not gold or even silver.
Taxes, growth, liquidity....that's our starting point before pulling out Ye Olde Crystal Ball to determine "pricing."
In short determine default risk first before extending credit. Since the default risk of something "new" is zero.....
Treasuries are just common sense and LEGAL risk management.
If Gramma is having her entire life savings stuffed into Alibabba or Facehugger I'm not saying that's wrong (although for the record it is illegal) all I am saying is "treasuries still look like a fine risk mitigation tool."
Of course "there is always The Bakken!"
Not a problem there either...
the low rates on treasuries create low rate on corporates / stock dividends ect.. Pension funds need income to pay out their pension holders (its not paid by the Govti a lot of cases) zero rates will make them bankrupt.. is so leave rates at zero you bankrupt the pension funds.. raise rates you bankrupt the Govt.. this is the delimma.. no one wants to talk about the impact low rates has on pension funds ability to pay out.. because that messes up the Fed/BOJ/ECB reality..
If everyone is expecting markets to return to the mean, then they won't.
Tah dah!
Gentlemen prefer bonds.
And of course you forgot to mention all that collateral needed to cover the derivative margin calls.
Tah dah #2
Gee, wonder why PIMCO's been having a retention problem the past 20 months if the future's so bright?
http://www.bloomberg.com/news/2014-12-02/pimco-total-return-withdrawals-...
Let see if they bump up that 2.6% US Long Bond position in their PTTRX fund in the short term.
Little Billy Gross had them short benchmarks and in lower quality.
Ain't worked this year.
Long high quality has had spectacular returns.
To wit: YTD long treasuries 18.2%
Long (CA good grief, the bad place by you all!) munis 10.3%
Intermediate Treasuries 6.3%
High yield: negative
So, Little Billy was not positioned for reality. Little Billy didn't believe in the Liquidity Trap. Little Billy has similarly positioned short, low quality at Janus. Little Billy is living in pre Liquidity Trap times. Too bad
Shhhhhhhhhh.
Don't jinx me.
It's beginning to look a lot like Christmas.
Why would the FED raise rates ?
The FED members are clearly ideologically opposed to free-market-based rates, as Bernanke said in one of his private paid-for dinners: if rates were higher, borrowers would have to pay more in interest expense - he understands the dynamics ! The paycheck-to-paycheck proletariat & economy, especially bloated by 10's of millions of uneducated, unskilled imported latin peasants, now depends upon ZIRP to keep it moving with record low mortgage & car loan rates.
There are NO politicians and NO powerful political groups, eg AARP, demanding that the FED raise interest rates - that would be almost as politically fatal as calling for cuts in entitlement programs.
The huge carry trade and leverage positions would have to unwind, causing an instant large drop in financial asset prices - very bad politically and economically.
If rates were higher, then the interest expense on the government debt would also be higher, and now that the debt has exploded to $18T, the politicians are compelled to keep rates as low as possible.
So what fool central banker is going to vote for self-destruction, ie raising rates, and why ????
Who works in farm knows very well what to plant in the summer does not stand nothing in winter.
At the height of the last crisis, rather than leave too big break, a hot time, decided to sow the economy with QE.
It will be a very cold winter, believe ...
No use show graphics and more graphics, any graph only shows that time according to what the son of a bitch Economist wants to show.
Economics is not science, it never was.
hehe.