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Michael Harkins offers a quick lesson in duration, saying a buyer of the 10-year Treasury at...

  • Tuesday, July 31, 2012, 11:30 AM ET
    Michael Harkins offers a quick lesson in duration, saying a buyer of the 10-year Treasury at 1.5% will get crushed with just a move back in yields to 2.5%. The bond market is a fabulous bubble, he says, growing in size as those who went short at the then impossibly low rate of 2.5% a year ago lack the conviction to do the same at 1.5%.
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This news story has 22 comments:

  •  
    The 10 year treasury yield is trading below the GDP deflator....the
    first time in a low inflation environment since 1956....
    31 Jul 2012, 11:35 AM Reply Like
  •  
    Yes, and in the next 20 years, even before the hyperinflation blip at the end of the '70's, the 10-year yield went from just over 2% to over 8%. Apparently, current holders think rate rises have been permanently repealed.
    31 Jul 2012, 11:50 AM Reply Like
  •  
    Yes, bbro. After you mentioned this in one of your stock talks I started researching it, and it is rare. As the economy keeps improving, which I believe it is and will, those people earning 1.5% are going to want more. When that happens a lot of that money will rush out as prices start to fall. I just keep reminding myself that most people get things wrong. I believe those that are buying t-bills now are getting it wrong. Sure there may be a few shocks before it all works out, but these yields will not last forever.
    31 Jul 2012, 05:32 PM Reply Like
  •  
    What a dumb comment from a supposedly smart person. Bond market bubble huh..Good luck with that Michael Harkins!
    31 Jul 2012, 11:40 AM Reply Like
  •  
    There is a big gorilla in the room...the Fed...its all up to them..if they stop buying..the bond market is toast....if they keep on buying....which I think they HAVE too....it will stay at close to 0..you have "safe" money buy you will lose out to real inflation...
    31 Jul 2012, 11:56 AM Reply Like
  •  
    To someone like myself who actually remembers when the yield on the 10 year US treasury was north of 10%, it does seem like an opportunity to go short. But in this upside down economy it may still take years for that bet to work!
    31 Jul 2012, 02:43 PM Reply Like
  •  
    They'll outlaw certain shorts in that event.
    31 Jul 2012, 08:24 PM Reply Like
  •  
    ... what a bubble. it will blow up eventually for sure.
    31 Jul 2012, 04:53 PM Reply Like
  •  
    How long can a debt issuer keep buying their own debt to support the market?
    31 Jul 2012, 06:00 PM Reply Like
  •  
    It is the usual technique employed by all sorts of banana republics. In the Developed World they call it QE these days. It is just debt monetization.
    31 Jul 2012, 07:57 PM Reply Like
  •  
    If you look at the biggest holders of US treasuries , most of the top holders do not have to "mark to market". So to them 2.55 on 30yrs is not expensive......

    For the rest of us citizens we will have that day of reckoning. I would guess that more than half of retail bond buyers do not realize the duration risk they have by buying a 30yr treasury at a 2.55 yield with the plan to hold it over 30 years!
    1 Aug 2012, 12:25 AM Reply Like
  •  
    Alot of players are sitting on huge unrealized gains, what happens when they move out of the trade? How much will the fed backstop, or will they let rates rise? Nobody knows. Best to avoid altogether.
    31 Jul 2012, 07:22 PM Reply Like
  •  
    And to your point, what happens to the cash that gets trapped in the 10 yr when values collapse? Some folks will book a loss to get their capital out but I have to believe that a lot of them will be forced to wait for maturity. Another lost decade for savers . . . on and on it goes!
    31 Jul 2012, 09:55 PM Reply Like
  •  
    Michael Harkins is of course correct. Folks who buy the 10-yr T bond at a yield of 1.48% (the current yield) can't do basic math. They will get creamed if interest rates climb just a tiny little bit. They're already getting creamed through inflation. Anyone can run hypothetical numbers with an Excel spreadsheet. And, for all that risk, they get paid a measly 1.48% per annum. Brilliant.
    31 Jul 2012, 10:56 PM Reply Like
  •  
    Bill Gross made that bad call a couple years ago. Ouch
    31 Jul 2012, 11:08 PM Reply Like
  •  
    The "ouch" is in buying 10-yr T-bonds at current prices, and holding on to that garbage for 10 years!
    31 Jul 2012, 11:20 PM Reply Like
  •  
    In a fiat money world economy the trashy dollar is the 'best of a bad lot'. It reminds me of the counterfeit goods markets in Third World countries. The vendors selling their bogus wares will tell you 'our counterfeit goods are of higher quality than other vendors counterfeit goods', which can be true. There are degrees of counterfeit and the US dollar is the best of the worse. But I prefer gold and real estate for the inevitable hyperinflation.
    1 Aug 2012, 12:17 AM Reply Like
  •  
    If you can tell me what the Fed will do...I can tell you what to buy or not....but with them "making" the market..Economics do not work anymore..
    1 Aug 2012, 08:53 AM Reply Like
  •  
    The last few years have spooked me so badly that I have my liquid investments over 50% in CASH. People have told me that inflation will kill me. I respond that I would lose even more by putting it into Tbills because of rising interest rates. I don't like equities much, although I have some defensive, dividend-paying positions, because I cannot see how the economy of this country or the world will improve soon. In fact I think we are in for another swoon pretty soon. The world is looking for a solution in monetary policy when the real problem is regulatory and fiscal policy. Even Bernanke has said that repeatedly, albeit too diplomatically, in his recent testimonies to Congress. The European bankers are saying the same thing. In China there seems to be little separation between the two. I am not hopeful about regulatory and fiscal policy improving because all I see is desperate politicians doubling down on their failing efforts to retain power in a stunning display of arrogance and ignorance. So I am losing real wealth because I fear seeking a better return anywhere involves too much risk of losing even more. Sorry to be such a bummer, but I have yet to find a convincing argument that I am wrong, and I try very hard to keep an open mind.
    2 Aug 2012, 01:21 PM Reply Like
  •  
    Meanwhile ,

    the Swiss 2-year note yields -0.454 %
    3 Aug 2012, 01:13 PM Reply Like
  •  
    When hyperinflation arrives (and surely it will, in
    my humble opinion) the yields that will be demanded
    by Treasury Bond buyers (both Pros and Retail investors)
    will be astronomical (think Jimmy Carter yields just for
    starters). Just before the USA goes bust within a few
    years yields may well exceed 18% on long-dated treasuries
    and those sane enough to load up now on (TBF) will make gains
    only matched by AAPL. In my scenario, TBF, currently just
    a whisker under $29 per ETF share, could rise into the
    multiples of $100 range. And the downside today is super
    low; in my entire lifetime I have never seen a 5 year time
    horizon LOCK like TBF or (PST). Opinion givers are always
    hedging their opinions but I will go out on a limb: Bet the
    farm against low treasury yields. Not since Sugar futures
    sold for ONE CENT ($0.01) has there been such a cinch
    trade available to rational thinkers.
    7 Aug 2012, 04:43 PM Reply Like
  •  
    Japan's up to QE8 , over the past 23 years , and they're still deflating , even with over 200% debt/GDP
    22 Oct 2012, 04:38 PM Reply Like
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