The Long Bond is Falling - Why?

While credit concerns at monoline insurers played a hand in yesterday's across-the board selling of muni closed-end funds. Let's not overlook the fact that long treasuries were also falling hard. It happened at the same time that Bernanke was babbling about "inflation expectation being well anchored." Coincidence? I think not.

The next major support on the iShares Trust Lehman 20+ year Treasury Bond (TLT) is 90, but I doubt that it will hold for long.

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So where is this money going? Where is the new safe haven? On the same day that the DOW dropped 175 points, the CRB index was conspicuously strong.

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Comments

[Aubie Baltin:]

UNCOMMON COMMON SENSE by Dr, Aubie Baltin

Just a quick lesson in economics 101. If you want to sell more of anything just lower the Price and believe it or not that holds for Bonds as well: After all who wants ti invest Money at 3 or 4% when the inflation rate is 5% and climbing?

2008 Feb 15 09:12 AM

[Michael B. ...:]

the jury is still out. if we ACTUALLY have a deep recession everyone is forecasting, aggregate demand WILL slowdown and thus prices will have to come down. Inflation rates will temporarily change.

So if you are indeed right, and inflation *for the next 2 years* be at 5%+, then this is also a signal stocks are a buy now (since prices won't drop because economic activity won't reduce from here).

I think this is all a wrong assumption -- when real scary #s of economic slowdown (job losses, systemwide defaults, etc) start hitting, the long treasury bond will fly in both the flight to quality as well as concerns about deflation occur. The long bond has no justification at 4.65% if we are in a long term cyclical credit contraction.

Doesn't anyone remember the 2001 recession when everyone was worried about price deflation? That will justify rates lower.

As far as oil and commodities are concerned, they will all come off when real demand gets hit in a big way. And that takes a real global recession. That hasn't come yet, nor has the fear of one yet hit. Look at countries like Australia that are still raising rates, have lowering jobless rates, etc all on the heels of rampant commodity demand. When countries like Australia and South Africa turn on lower commodity demand, the bond will look great with a 3% yield.

2008 Feb 16 10:51 AM

[Will Rahal:]

Inflation is re-accelerating. This does not help.

I have posted an interesting chart of CPI vs the performance of the
S&P. It is clearly negatively correlated

2008 Feb 16 11:39 AM

[Michael B. ...:]

of course it is - high cpi translates to higher yield on treasuries, which translate to a higher required yield (lower price) on the S&P.

but true global recession will not coincide with price inflation, i guarantee you.

2008 Feb 16 11:43 AM