Rising T-Bond Yields Are a Bullish Sign

Treasury bond yields have surged since their December lows. Today's auction of 30-year bonds resulted in a higher-than-expected yield, even though Treasury was only selling a relatively paltry amount, $14 billion, compared to the trillion-dollar deficits that will be the norm for the next several years at least. Due to sharply higher yields, 30-year Treasury bond prices have fallen 25% so far this year.

The equity market has rallied, and the Treasury bond market has sunk, because the market has realized that instead of collapsing in a deflationary depression, the economy appears to have stopped declining and deflation is nowhere to be seen.

All those investors and speculators who were desperate to pile into cash at the end of last year have apparently been asking themselves this year whether they want to hold onto an asset that yields almost nothing. On the margin, investors have concluded that they want less cash. As the world attempted to reduce its cash holdings, the prices of other things have risen: equities have surged, commodity prices are up across the board, junk bond prices have rallied, and emerging market debt and equities are on fire.

As I said in a post last December, if the economy doesn't continue to deteriorate significantly, then cash will prove to be a major embarrassment. Today I would modify that statement as follows: If the economy doesn't deteriorate significantly, then cash will continue to be a major embarrassment.

So, in the absence of any sign that the economy is deteriorating, and in the face of mounting evidence that the economy may actually be recovering, I think the trends we have seen so far this year will continue. T-bond prices will continue to fall, while the prices of just about all other asset classes will rise. TIPS prices may not rise, but TIPS will benefit from the rising inflation that is likely to follow the rise in commodity prices. Selloffs such as what we see in the equity market today are to be expected of course, but they just create buying opportunities for those who are embarrassed by their cash holdings. The attractiveness of cash is not likely to improve any time soon, since the Fed has all but pledged to keep short-term rates near zero for a long time, and all major central banks are toeing the same line.

Full disclosure: I am long equities, long emerging market debt (EMD), long emerging market equities [SLAFX], long TIPS (TIP) and short T-bonds (via TBT) at the time of this writing.

Comments

[Michael_Cohen:]

Or rising T-bills will have the crowding out effect of making it even more difficult for businesses to get credit. If the long bond gets up to 8%, why loan to anyone besides the US government?

May 07 03:20 PM

[Tom Colangelo:]

The author either chooses to ignore or, more troubling, is ignorant of the fact that as Treasury bond yields rise so do mortgage rates.

This undermines a KEY COMPONENT of the Fed's attempts to restart the housing market. Higher rates decrease the number of potential home buyers. This is so important that the Fed is buying bonds to keep this critical interest rate low.

If this effort to help the housing market fails, then we may be in for a lost decade like in Japan.

So we should be deeply concernd in two ways:

1) buyers are requiring more return from Treasuries. This makes our recovery more expensive and raises rates causing inflation above and beyond the monetary inflation of trillions being pumped thru banks.

2) the housing market and all other consumer spending will be chilled making tthe recovery more remote from today.

So instead of cheering, we should shudder at the fact that the last auction went off at 3.295% (a horrific number at the very least)!

May 07 04:16 PM

[doubleguns:]

I remember 18% in the 80's. Thats what we could be looking at again since this seems worse. Only can hope that enough capital evaporated in the plunge to keep this runup reasonable.

May 07 04:33 PM

[logicalthought:]

Oh really, "pundit"? What if rates are going up because the government now has to borrow the trillions of dollars it has ineffectively pissed away, thereby giving us the double-whammy of both high rates and DE-flationary non-growth?

May 07 04:35 PM

[heyjoe:]

stagflation on the way?

Tom mentions the housing market.. It is so messed up right now. They are tearing down brand new homes in some areas, yet we are keeping interest rates low and encouraging homebuilders families to keep building and buying with low interest rates and tax credits!!!

May 07 05:57 PM

[altaman:]

Lipstick or not it was a pig of a Treasury auction. The author is reaching the correct conclusion, that rates are heading up, for the wrong reason.

"Today's auction of 30-year bonds resulted in a higher-than-expected yield, even though Treasury was only selling a relatively paltry amount, $14 billion"

Yes and the crash down in price suggests very little appetite for that "paltry" offering. Now the Chinese are whining again about that criminally negligent $300B QE and they seem increasely reluctant to gulp the humongous torrent T-fluff in the offing.

The Treasury bubble has burst and rising rates are now a leading indicator that the economy has a long way to go to the DOWNSIDE not another freaking "green shoot." The demand for money is for money going into capital reserves, to deal with sour assets, not for capital investment which would be bullish.

The Obama's Keystone Kops bet everything on another cheap money reinflate but, as we realists know, it is not nice to mess with Mr. Market.

May 08 01:32 AM