U.S. Treasuries in a Bubble, Not Commodities

US Treasuries are not behaving the way that they "normally" should.

We say this looking at strong equity, commodity, and precious metal prices. The price of US Treasuries should be falling, or at best not rising. Rising gold, silver, platinum, copper, equites, et al, seemingly are good for US Treasury prices.

Rising prices of precious metals should be seen as inflationary; so how US Treasury prices rise

Here is another thought; in six months from now, Gold could be trading at around $1300 and Silver at $25, if current trends continue. Where would US 10 & 30 year Treasuries be trading then?

Is the activity in the US Treasury market the real deal? Is it correctly anticipating a "deflationary" and/or low growth environment? Perhaps commodity prices are about to implode as last year. Or are precious metals and commodities suggesting something about US Treasury prices.

We think that the real deal lies with the behavior in commodities (precious metals in particular), equities, and the TIP:US 10yr spread - that is, US Treasury markets are on the verge of falling into the abyss rather than commodities.







A number of commentators have argued that "bubbles" exist in equity and commodity markets, well perhaps, but just maybe the real bubble is within the US Treasury market.

Disclosure: Long DBC, TBT, SLV and DIA

Comments

[geohjr]

Two issues possibly impacting treasuries. Data indicates China is swapping out of agencies and into treasuries in a big way. From that perspective treasuries look a little more desirable There's also a theory that tarp banks are using zero rate funds to purchace treasuries in a no risk carry trade. It certainly makes no sense and makes bonds interesting for the first time to me,

2009 Nov 18 09:04 AM

[ManAboutDallas]

It's the last-gasp attempt by the Fed to manage the yield curve and pretend "everything's ok". The inevitable can be forestalled only so long, however. The pin this bubble will find is when either:

1. Gold tops $1344; or
2. Oil reaches $100 again.

At that point the US$ will be carried off in a body bag and it'll be "Weimar, Part Deux" time.

2009 Nov 18 09:18 AM

[Mudduckk]

When will GLD start paying a risk free dividend? Consider what investors will prefer if come DIA correction from a deflationary credit collapse. Refer to catering theory, investors prefer securities with a coupon, especially when real rates are flat or declining, because the coupon get's sweeter and sweeter. Ask yourself, why did Buffet get a 10% preferred from GS. Because he knew in a credit deleveraging cycle his rate of return improves as the market rate declines. He read Bernanke's work and he bet the man would implement a sympathetic monetary policy. He's an advisor to Obama, and he bet Obama would choose to retain Dr. Ben as head of the fed and chief money printer.

I admit GLD is nice. As a hedge, but not as a primary investment strategy. I echo David Rosenberg's sentiment on this. He has been suggesting commodities and defensive income investments including bonds. As of late he has been specifically suggesting GLD. But to suggest a bond bubble is in the works is foolish. Wake me up when the US economy has wiped out between 30 to 40% more of its debt, until then inflation will remain a boogey man.

2009 Nov 18 09:24 AM

[lance sjogren]

I agree there is a bond bubble. However, so long as the US is committed to artificially depressed interest rates I see no reason why bonds will collapse in nominal value.

The bond bubble will burst GRADUALLY, the mechanism being that an annual devaluation of the dollar of 10-15% over the next 4-5 years will cause the inflation-adjusted value of bonds to drop by about 70-80%.

2009 Nov 18 09:59 AM

[richard_e_newton]

The key thing to watch is the treasury auctions. With current CPI-U, all-items inflation at 2.73% (November announcemnt for October, 2009), you have to go out 7 years in treasurys to get a positive real yeild (2.87% as of 18 Nov, 2009). How long will treasury investors put up with this situation? When treasury auctions begin to fail the jig will be up. The fed will no longer have much of a choice -- unless they raise rates the Treasury won't be able to refund debt coming due.

2009 Nov 18 10:37 AM

[eddybaby]

Ask yourself why the Fed is working so hard to pump money out there at present? A likely answer is that they see the most significant threat to the US economy as deflation.

With this in mind (and the fact that even the Fed & Congress can't go on forever pumping cash) it makes some sense that treasuries are being bid so high (and down to low yields)

It could well be the equity & commodity markets that "blink first"

2009 Nov 18 10:39 AM

[Tony Daltorio]

I agree with the author...the bubble in US Treasuries is the biggest I've seen in my near 30-year investment industry career.

And when that buuble does burst, look for the possible collapse of many major US financial institutions who have moved their assets from one bubble - mortgage securities to another bubble - Treasuries.

2009 Nov 18 03:18 PM

[richard_e_newton]

With money continuing to pour into treasurys, the only way it makes sense to me is that treasury investors think that they are getting real yields when they are not. They must be believing that they are getting the nominal yield plus the .2% from the minus 0.2% year over year CPI-U, all-items announced today. Trouble is the year over year number is a rear-view mirror, lagging indicator that tells us about the deflationary period from October 2008 to December 2008. Current inflation since December 2008 is 2.73% (annualized) at the consumer level and 3.18% at the wholsale level. If investors knew this I don't believe that they would be so sanguine about investing in treasurys.

2009 Nov 18 03:53 PM

[JasonC]

Problem - the premise is false. The Fed isn't pumping out money. The Fed's balance sheet is the same size as it was last October. All that happened in the meantime is the emergency short term loans to the banking system etc were repaid, and the Fed parked the proceeds in treasuries and agency mortgage backeds.

Everyone in the world is predicting the same US inflation and dollar collapse that was the bubble in the first place. It didn't happen 2005 to 2008 because the Fed held M1 completely constant over that span. It isn't going to happen this time either because the Fed hasn't moved its sheet size in a year.

The treasury auctions are 4 times oversubscribed in bills at zero and 2.5 times oversubscribed for the 10 years with actual yield.

Foreign investors did stop buying agencies over the last year but continue to buy treasuries hand over fist. China, Hong Kong, Japan, the UK, everybody else in smaller amounts. They may talk about the dollar being old hat but it continues to be the place they are parking their net new reserves. Foreign investors have also been buying the US stock market since April, at a $15 billion a month clip.

And the reason is clear - they are not willing to see their current account surpluses disappear, by actually pushing the US to trade balance. So the net capital inflow ot the US has slowed but it remains an inflow.

As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really. Their foreign stocks got slammed; Americans don't buy foreign government bonds. Meanwhile the supposedly stupid US treasury positions all the foreigners have piled up earned plus 13% in that smash year. Foreign ownership of US assets went down because of the stock market decline, but only by $1 trillion, while US holdings abroad dropped $2.5 trillion - because we own their stock and they own our bonds.

As of the end of 2008, US investors had only a 5% position in foreign stocks and only 3% in foreign bond assets, and 80% of the latter are dollar denominated. The total US investor position in the BRICs is less than 0.5% of US household assets. Some carry trade. Nor can this change much net in the short run, because the net flow of capital remains inward at a $400 billion a year rate.

People talk their ideology but their actual trading positions are saying something quite different. Risk aversion is off the charts after last year's smash, and secular deleveraging continues.

2009 Nov 18 06:14 PM

[Genesis]

Good comment overall. However, the carry trade has absolutely nothing to do with the nationality of the investors. Rather, it is about investors of any nationality borrowing dollars at a low interest rate in order to purchase currencies or assets that are either guaranteed or expected to yield a higher return.

"As for the much vaunted "carry trade", US investors owned less in foreign assets at the end of last year than nearly ever, really."

2009 Nov 18 09:57 PM

[Mark Anthony]

Calling the US treasury a bubble is put it too lightly. A bubble is still something of value, it is just over-valued. The US treasury is not a bubble, but a PONZI Scheme, later comers pay the early investors. The bag holders lose every thing when it all collapses down.

There is now no longer any real possibility that the US dollar could be salvaged. It's no longer possible for the astronomical amount of US debts to be paid. Raising interest rate is no longer meaningful, because the higher interest rates merely means more money will be printed out of thin air to pay the interest.

Read why a collapse of the US dollar is now not avoidable:
seekingalpha.com/autho...

2009 Nov 19 03:04 AM

[Mad Hedge Fund Trader]

bgt I want to thank the many readers who have been mailing in gold and silver coins in appreciation of my efforts to get them in at the beginning of the year at $800/ ounce for gold and $10/ounce for silver. Gold hit a new high today of $1,155, while silver tickled $18,75. The guys who leveraged up made an absolute killing, and they have numbers like $1,300, %2,300, and $5,000 dancing in their dreams. Hardly a day goes by without the mailman knocking on the door, a heavy but compact package in hand, smiling and winking while I sign. I also want to thank the reader who I got into the TBT in January. He had never heard of the thing, the ETF that bets on falling Treasury bond prices, but managed to ride this bucking bronco from the high thirties to $60 before pulling the ripcord. He sent me $300 trillion Zimbabwean dollars in cash in three crisp new $100 trillion banknotes hot of the printing press. He gave that amount because that is what it now costs to buy a cup of coffee in the hopelessly mismanaged African country. I see the TBT is back down to $45 handle again. Hmmm, looking at Obama’s latest deficit spending plans, I wonder if it is time to take another bite out of the apple?

2009 Nov 19 09:55 AM

[Carl Spackler]

I like Mark Anthony's hat almost as much as my assistant greenskeeper hat in my Carl Spackler picture! Couldn't agree more with the arguments here - US Treasuries are 150-200 basis points too low. Eventually, just like water, things find their natural level despite man's interference.

2009 Nov 20 03:22 PM