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What Will End the 34-Year US Treasury Bond Bull Market?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
I see #1 and #4 as the most likely triggers of a rise in Treasury yields.
U.S. Treasury bonds (10-year and 30-year) topped out above 15% in late 1981, and have traced a sawtooth pattern down ever since. The 10-year bond now yields 1.92% and the 30-year yields 2.51%.
Correspondent Mark G. recently asked a question that is on many minds: what might finally produce an end to the 34-year US Treasury Bond bull market? Here is Mark's commentary on the question:
10 Year T-Bond interest rates are falling again after a minor rally. This leaves me pondering a nearly 20-year old question: what might finally produce an end to the 34-year US Treasury Bond bull market? Neither the beginning or end of three different US QE programs, plus Japanese and ECB QE programs, have served to do this. Nor did oil price booms to $140/bbl, or price crashes to $42/bbl WTI with threats of further decline. Or any other commodity or possible index of commodities. Various FOREX levels so far have also been only correlated over the very shortest of terms. Stock market bull bubbles and bear crashes have also come and gone without lasting effect. War, peace, Cold War, Cold Peace ditto.
My background education and experience says that before this T-Bond bull market can end the US T-Bond sellers will have to routinely overwhelm the buyers.
As Mark observed, the price of bonds (along with all other securities) is established by supply and demand. For prices of any financial security to fall, sellers have to routinely overwhelm buyers.
Demand is one factor; supply is the other. If the security is scarce, then even modest demand can push the price up. If the security is in surplus, demand can be overwhelmed by supply.
So the only way that the yield on Treasuries (or any other security) can rise is if supply overwhelms demand. If there are no buyers of bonds at a low price, the yield must rise to entice buyers to part with their cash.
If demand soaks up the initial issuance but more issuance hits the market, the yield will rise as demand for more bonds simply isn't present at low yields.
The central banks have manipulated the market for sovereign bonds by creating new money out of thin air and buying bonds. The goal is to suppress interest rates. And since central banks can create as much money as they want, whenever they want, there is no limit to how many bonds they can buy.
Rising yields once acted as a limiting factor on governments' issuing more bonds to fund their fiscal deficits. But since central banks have created trillions of dollars out of thin air to buy as many bonds as the Treasury issues, rates can be suppressed for as long as central banks are free to create trillions out of thin air.
If we put these dynamics together, we can sketch out a few possible conditions that would have to be met for U.S. Treasury yield to rise:
1. The Federal Reserve (the central bank of the U.S.) would have to be restrained from printing money to buy Treasuries. This could be informal political constraints (i.e. widespread public distrust of the Fed based on its role in exacerbating wealth inequality) or it could be the Federal Reserve's charter and powers are limited by acts of a Congress that is hostile to its counter-productive money-printing and financial repression.2. The supply (issuance) of new bonds rises to levels that overwhelm demand. Were the U.S. government to run enormous deficits, the supply might well overwhelm demand, especially if the Fed were no longer free to print up another $3 trillion to buy bonds.3. Other sovereign-debt markets that are currently being sold in favor of U,S. Treasuries would have to become more attractive in yield, liquidity and safety than Treasuries. Right now, oligarchs around the world have already suffered losses of 15% to 25% on their wealth not held in U.S. dollars.The rush to sell other currencies and assets to buy dollars and Treasuries has enabled the Fed to end its quantitative easing/bond buying programs; the demand from overseas buyers has been strong enough to push yields down to historic lows, even without any Fed purchases.This trend would have to reverse for Treasuries to be sold in favor of some other sovereign bonds.4. The phantom wealth in risk-on assets would have to dissolve on a global scale, forcing owners of unleveraged assets such as Treasuries to dump their Treasuries en masse to raise cash to pay down U.S.-denominated debt and to to fund their lavish lifestyles.Once the markets for yachts, super-sports cars, etc., dry up, these assets go bidless: nobody wants a costly-to-maintain yacht or super-car at any price. Real estate may retain more of its value than oligarch toys, but real estate is famously illiquid; the margin call must be paid in days, and finding a buyer for luxe real estate takes longer than days.That leaves precious metals and the amazingly liquid Treasury bonds as assets that can be sold in a hurry to cover debts being called due to the collapse of risk-on bubbles in equities, junk bonds, real estate, art, yachts, super-cars, etc.
I see #1 and #4 as the most likely triggers of a rise in Treasury yields. The collapse of phantom-wealth bubbles could occur in the next year or two, or be delayed for another 5 to 6 years. But the implosion of phantom-wealth bubbles is assured by the internal dynamics of bubbles.
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China taking a trillion dollar dump on it's head.
The bubble will not end until people realize that sending their hard earned money to Wall Street or Washington DC is the equivalent of flusing it down the toilet.
Its all paper anyway. Flushing it down the toilet was inevitable. My silver on the other hand...
Interesting thoughts on bonds:
http://debtcrash.report/entry/debt-taken-on-by-fools
http://debtcrash.report/entry/i-bought-what
#1 is suicide, not gonna happen. #2 should happen, but is negated by #1 prevention efforts.
My vote? ZIRP4EVA! And war. Lots and lots of war.
Yeah, no doubt #1 is suicide. It also presupposes that the government has a say in Fed policies. They got that one ass backwards.
Nothing... The Fed and other central banks will simply own it all...
Then all fiat will die.
This is global weimar, could be a while...
Yes, and on a personal basis they will have converted much of the printed fiat into real assets since they understand it'sa scam. Their Jewish buddies now own everything, including the corporations they have taken over but didn't build.
that which cannot be sustained, won't be, period. There never has been an economic, monetary, fiscal, or political solution to resource scarcity or the greed of men.
War it shall be, prepare yourself, your loved ones, and your tribe.
#5. All people just start buying physical Gold.
It's silver that the banksters are really scared of.
utter drivel
Even worse. This crap is intentionally misleading. This guy should know better. Seems like he's ignoring the lessons of Japan.
Sofia Vergara is going to arrange to meet me and sit on my face, after I spend an hour or two playing with her Bodacious Ta-Tas, and eating Haagen Daz, Fresh Strawberry Ice cream (the most strawberries in a commercial ice cream, Costco has the most strawberries per gram of their frozen yogurt sundae) off of her bootyful derriere.
Probably within 2 years, maybe 5 yrs, could be a bit longer, like maybe the next millennium.
It's a rigged market, already over.
You missed it on NBC newz?
The author ignores how the risk trade works and how exiting the risk trade/liquidity events are beneficial to treasury bonds.
Absent QE, US interest rates would be lower than where they are today. $10 trillion in equity "value" would disappear.
If collateral (US treasuries) had to be owned, instead of rented daily from the NY FED (via reverse repos which pay banks to rent them!!!), rehypothecated collateral chains would collapse and expose the repo market and cause margin calls for US treasuries - forcing players to buy treasuries in a market where holders of treasuries are not going to give them up at these levels.
Agree with article. slowly building PM, but try to limit PM exposure to 50% of the total you want. buy the last 50% when market dumps. Gold and Treasuries will be sold quickly, but after this flow of funds issues, i see Gold skyrocketing. good hedge is slowly buying now and keeping some liquidity for market event.
It will just happen overnight without warning.....bet on it
"first by inflation, then by deflation..." 1857, 1873, 1893, 1907, 1929, 1973, 1987, 2000, 2008, & ????
http://ca.reuters.com/article/businessNews/idCAKBN0MM2JG20150326?sp=true
NEW YORK (Reuters) - The New York Federal Reserve officials tasked with prying interest rates off the floor have been meeting with bankers and traders to plot how best to do it, amid deep uncertainty over how much control they will really have over short-term lending markets.
With the U.S. central bank expected to raise rates later this year, Simon Potter and his team of market technicians have the tricky job of implementing higher rates using some new and lightly tested tools as well as some that may not work as well as in the past. They'll be operating under intense global scrutiny that's centered on the prospects for the world’s biggest economy.
Even while testing new methods meant to sweep up trillions of dollars of reserves from financial markets, Potter's team is preparing for volatility and to make on-the-fly adjustments when the time comes, according to interviews with Fed officials and market participants.
The trouble is that the federal funds market, the intra-bank trading pool traditionally used by the Fed to meet its policy goals, has shrunk to about a quarter of its pre-crisis size after more than six years of unprecedented monetary stimulus.
"There is a lot more uncertainty in the mechanical features of the outlook than people admit to," said Joseph Abate, a money-market strategist at Barclays Capital.
The Fed wants to avoid a scenario in which yields don't rise enough after it lifts the fed funds rate because banks, flush with $2.5 trillion of reserves parked at the central bank, don't need short-term funding.
The central bank also risks being drawn so deeply into money markets that it destabilizes things.
That's why the New York Fed, already under political pressure due to regulatory missteps, is taking every precaution it can to protect its credibility and that of the central bank. It wants to make sure that when the central bank decrees higher rates, yields will actually rise.
To combat anxieties on Wall Street and in Washington, Potter and his deputies have been hosting regular lunches with market participants to ask and field questions about what sort of market tinkering will might be needed or avoided to get it right, and how banks and funds will react.
He's has also met with officials at the European Central Bank and other global counterparts to outline the U.S. plan to tighten when most of them are easing.