Seeking Alpha

Long-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for...

Long-time bond bull Robert Kessler takes a victory lap and says there's plenty of room for yields to fall further. That's bad news for stocks, he says, as low yields are forecasting lower profits. How to make money with these yields? Banks can conservatively lever 20-to-1, borrowing for nothing to make 15% returns. It's a casino, but the House (the Fed) is paying everybody to play and win.
Comments (60)
  • American, Swiss and German banks are making an absolute MINT off of the woes of their Mediterranean brothers.


    There is no better business on Earth than borrowing at 0% and lending at 5% with 15x to 25x leverage.


    2 Jun 2012, 12:16 PM Reply Like
  • So you are presumably saying these banks stocks are good to buy?
    How come then that Moody's downgraded nearly all German and Danish banks just two days ago?
    3 Jun 2012, 05:02 AM Reply Like
  • Of course they aren't good buys NOW.


    The market psychology is SELL EVERYTHING!!!


    Once the "risk off" market starts puttering out (at the end of the European debt crisis) then banks (which will be trading at half of current levels) will be the ultimate investment.


    In short, a great company isn't a great buy until people stop dumping its shares.
    3 Jun 2012, 04:15 PM Reply Like
  • So you're saying we should just time the market?
    3 Jun 2012, 10:11 PM Reply Like
  • Any time one buys equities they are "timing the market".
    4 Jun 2012, 09:45 AM Reply Like
  • That with the leverage has its problems......
    2 Jun 2012, 12:37 PM Reply Like
  • The damage to pension funds, insurance companies, etc. may not show for many years. The unintended consequences of policy action.
    2 Jun 2012, 12:38 PM Reply Like
  • Add senior citizens and the middle class to your list.
    2 Jun 2012, 01:02 PM Reply Like
  • The damage to pension funds, insurance companies, individual savings and retirement funds is already showing up. The massive unfunded liabilities of pension funds continues to get worse by the year with these ultra low interest rates.


    The only hope for the pension funds is for a massive sell-off in equities and risk assets, aka 08/09, so that real LT investors can reallocate part of their portfolios to equities and risk assets at much much lower than current levels.
    2 Jun 2012, 04:31 PM Reply Like
  • But to have massive unfunded liabilities is to be SHORT higher risk/reward assets and hence the stock market (among others) won't sell off significantly for a long, long time.
    3 Jun 2012, 06:04 AM Reply Like
  • New target on the 10Yr yield: 1%.


    The Fed is pushing investors into riskier assets, but they also have a motive to keep Treasurys "low and stable" and as attractive collateral for funding markets. What they cannot indefinitely control is that Treasurys gain "latent" interest rate risk as the hedges are applied to suppress their yields from rising sharply. As I also point out, these debt instruments are increasingly woven into the financial fabric.
    2 Jun 2012, 12:58 PM Reply Like
  • "pushing investors into riskier assets?" Come on slick, JNJ is risky. There are so many 3% to 5% "unrisky" stocks to make that statement silly. How about, OMG one invest in, say, SDT or LINE or...the list goes on forever.
    Junior economists, there is a good reason interest rates are low. Drag out your Econ 101 textbook and read some. Unless you think economics is a liberal conspiracy, if that is the case there is no hope for you.
    2 Jun 2012, 01:29 PM Reply Like
  • JNJ and other drug and healthcare stocks could be hurt if Obamacare is enacted and he is re-elected.


    Obama thinks that no profits are ethical for healthcare related businesses. He will crush all their margins if he gets the chance- especially if the government becomes the main buyer of their goods and services.


    That's why pharma shares have done so poorly over the past few years.
    2 Jun 2012, 01:51 PM Reply Like
  • I agree but Lindsay Lohan has a better chance of being elected president than Obama (again).


    President Romney, January 2013
    2 Jun 2012, 03:04 PM Reply Like
  • Sorry Stocknerd...


    But Whitehawk is spot on...JNJ may be a good yield but does not carry the same weight as the U.S. Treasury and is a riskier investment.


    I think the point Whitehawk is making is that over time, most generations when they retired utilized their savings to invest in government bonds (considered to be the most secure investment) that yielded 4-6% to supplement their retirement plan income stream (IRA, 401K or Social Security).


    Now, with the FED driven yields on government bonds and T bills at 1.5% or less (you are actually paying the government to use your money if you consider the effects of inflation) retirees can't sustain a decent standard of living.


    Certainly, some will invest in stocks such as JNJ, PG or MSFT. However, many do not have the knowledge, investment acumen or financial resources to do so and in any event while yielding better returns they are not as secure as government guaranteed debt and thus are more risky investments.


    If you want proof...look at the price performance of those great yielding equities last week and see how they and the DowJones, S&P 500, etc. performed.


    Consequently, those on fixed incomes got hosed by the government that drove them into those riskier investments.


    This is all by design on the part of the FED and our illustrious government leaders and is a situation that is not likely to get better for several years as the government cannot afford to let interest rates on debt move higher (which free markets would mandate as risk gets higher). The truth is we can't pay the higher interest. If Interest rates were to move from 1.5% (where they are today on the 10 year Treasury) to 5-6% (where they are now moving in Europe and where they will move in the US eventually) the amount of money needed to just pay the interest on the ballooning national debt (forget about ever paying the debt down) would equal more than 100% of all the taxes collected annually by the US Government...would allow no money to pay for other government activity such as highways, schools, armed forces, social security, medicare etc.


    I believe this explains to some degree why our government is hell bent on this national health care law (it allows them to contol 1/6 of the national GDP associated with healthcare). It also explains why they are now in the process of trying to draft some form of legislation that will allow them to confiscate and manage all private pension funds, IRA's and 401K's...they need to have control over those dollars and expenses to help meet the coming financial disasters they have promulgated through their prior actions.


    Bottom Line...Fixed Income Americans are being forced into riskier and riskier investments (chasing higher yields) while simultaneously being crushed by market reactions to the actions of US and other governments. Our President and Legislators will then reason that the average American is not sophisticated enough to manage his or her own retirement savings as justification for confiscation of what resources Americans have left. And yes I do believe it is planned as a way to move the US into a situation where the majority of our citizens are dependent upon the Federal Government for our daily sustenance.


    Paul Nichols
    2 Jun 2012, 03:16 PM Reply Like
  • Your argument is illogical. Your type complains when the government is wasteful and complains when the government tries to save money. If Obama were a corporate CEO, what would be wrong with directing his management to negotiate the best deals for healthcare costs? As a consumer of health care, the United States Government should be hard nosed with any supplier including those who supply health care services. Unlike private industry, government purchasers can also go to jail if they are on the take. Finally as an investor in small pharma, some big pharma's have done poorly in part because they don't know how to manage or outsource or in source innovation. In other words, wall street doesn't think much of their pipeline.


    The current model of using the emergency room as the health care of last resort is plain wasteful.
    2 Jun 2012, 04:01 PM Reply Like
  • BIg pharma sucked over the past years because:


    1. Lack of innovation and patent expiration;


    2. Extreme over valuation in year 2000.


    Despite that, big pharma easily sported profit margins of 20% or more, way higher than the hated Exxon Mobil. Since our nation is being crushed by healthcare costs and uninsured middle class is being bled dry, shouldn't big pharma be forced to cut back some of their greed and return 10% of their margin to the society?
    2 Jun 2012, 08:29 PM Reply Like
  • "when the government tries to save money" is indeed plainly illogical too...
    2 Jun 2012, 11:44 PM Reply Like
  • I'd take your bet on Lindsay Lohan and leverage it 3000-1.
    2 Jun 2012, 11:48 PM Reply Like
  • Maybe Lindsay can take the "constitutional law" class that professor Obama will be teaching nightly at Chicago Community College starting in late January 2013.
    3 Jun 2012, 04:17 PM Reply Like
  • Last words.
    3 Jun 2012, 10:20 PM Reply Like
  • Evidently this is how the US government will hoodwink the world into buying its Mr. Kessler suggests, banks and hedge funds can lever treasuries twenty to one. So every institution can buy 20 times the amount of treasuries they would normally buy, and the treasury can issue twenty times the amount of debt!
    As Mr. Greenspan suggested on CNBC the other day, if the central banks just keep expanding their balance sheets ad infinitum by printing money, we can do away with taxes altogether. (it's not clear if he was jesting). With the Fed buying about one half of each new issue of treasuries, and the one percent paying little or no tax, this would appear to be the way things are heading. Gee, I wonder how this will turn out?
    2 Jun 2012, 01:59 PM Reply Like
  • Increasing productivity + shrinking population = Strong deflationary pressure.
    2 Jun 2012, 08:31 PM Reply Like
  • Not everybody, only banks. The rest of us can't borrow for nothing nor gear up 20-1, so we can only lose money owning these bonds.


    There is very little left here. It is not for me to say how much longer real yields will be negative; with the degree of manipulation and the depth of the disconnect between the banking world and the real world, it could be an hour or a decade. What is for me to say is that the risk/reward tradeoff in these securities is as unfavourable as that in any asset has ever been. So there are two ways of looking at it: either bond yields are no longer meaningful to real-world investors (in which case we should ignore them as they're no longer part of our asset universe) or bond yields reflect extreme market insanity and we should stay as far away from them as possible. Whether some bank may manage to eke out a 10% gain somewhere by risking its entire existence on the continuation of crony capitalism is irrelevant to any decision we may face. The choice is as obvious as any investment decision in human history: real-world investors must not own bonds. If you have any, sell them now.
    2 Jun 2012, 02:23 PM Reply Like
  • 20:1 is available on real estate especially bank owned in the US.... 5% down is alive and well, thus teeing us up for the next run up in real estate....


    disagree with you respectfully on the bonds, there's a lot of upside in TLT and ZROZ for a good while as the equity markets revisit 08/09 lows and then some....
    2 Jun 2012, 03:14 PM Reply Like
  • buyitcheap,


    tell me, friend, who will do all the forced selling this time around? The only reason we fell so deep in 2008 and 2009 was through forced liquidations, for example of CDOs and SIVs that were delevering. And the panic of the relentless selloff in credit then spread to equities, as the entire world's banking system was on the brink.


    Now the leverage in the system has been greatly reduced and after 4 years of constantly scary headlines most people have already given up. So who will do the forced selling this time? All companies are sitting on hoards and hoards of cash. Why would they sell off 40 % from here?


    Then again, don't bother answering. Keep holding on to that dream of yours. You missed the bottom last time but doggone it, you won't miss it this time, right?
    2 Jun 2012, 03:54 PM Reply Like
  • Although the individuals are largely out, there will be hedge funds selling / delevering / shorting, and the corporate buy-backs will dry up. You won't necessarily have massive forced selling (there will be some), but you will have no buyers--this multi-month rally has been all hedge fund momentum chasing and corporate buybacks. You will have big air pockets to the downside as stocks get re-rated.


    Stocks are richly valued based on normalized earnings and tepid growth prospects although somewhat less so than at the 2007 peak. Per Gary Shilling, with a recession, you get S&P earnings going to maybe 80, and put a reasonable bear market multiple of 10 on that, and you get 800 at the bottom. 800-900 would also be in line with history--a recession on average involves a 40% peak-to-trough decline. The last two were worse, but the last two also started from frothier valuations.


    Your balance sheet observation is worthwhile as it suggests we won't go as low as 2009 when everyone feared insolvency risk even among high-quality cyclicals.


    BTW, I didn't miss the bottom last time--was aggressively invested with options-based leverage.
    2 Jun 2012, 04:59 PM Reply Like
  • Fantastic sarcasm, friend, and so devoid of insight. You think we're less levered now, really? The same jenga blocks that were in place in 08, are still there now.


    I'm up for the year, same as the last 5. I'll even be more specific since you only seem to be able to handle broad characterizations. I've got a target of 865 on the S&P. I'll swing back around to you when it hits but in the meantime you keep up the uninformed, wise ass posts.
    2 Jun 2012, 07:24 PM Reply Like
  • The whole thing was arranged for the banks. Remember, they are insolvent if we go back to mark-to-market. Bernanke has been feeding the banks free money to help them get ready for the loan losses they will have to eat when interest rates go up and housing prices implode.
    2 Jun 2012, 11:50 PM Reply Like
  • buyitcheap,


    since you do not provide any stats whatsoever to support your viewpoint that leverage now is NOT lower than it was 4 years ago I guess we just have to take your word for it.


    I mean, a guy like you who was profitable for 5 years (!) in a row cannot possibly be wrong about anything ever. That would be against the laws of the universe.


    Your target of 865 will surely be reached. It must be so, or you would not have said it.
    3 Jun 2012, 03:09 AM Reply Like
  • Been around long enough to know a 2nd lieutenant when I see one. 865 is about 5% above a technical low that I'm keeping my eye on and it's evident if you look at a multi decade technical chart, you'll see the H&S pattern and you bet that influences my investing and I've made that post multiple times.


    I also like to look at the opinions of other thoughtful investors, but I took a look at your blog anyway, last post in 2009? You must have been busy. You have real chutzpah ripe old age of about, what 35, with, maybe 10-12 years of trading experience? It would appear that you've experienced, one, maybe two, entire downturns in the market. TWO! I could easily envision you having had similarly informed posts about never reaching the 2001/2 lows either again either right? Having watched those two downturns wipe out a lot of investor friends capital and jobs, it is very much the filter through which I view markets and I'd much prefer to sell a little early on the up move than be long when the downturn comes and wherever possible buy as cheaply as possible. Risk and position management, things like that.


    I see young guys like you all the time late 20s early 30s, who start to believe in their infallibility of a little success. Usually, they implode, at least once, and that tends to properly humble them, so I'll wait and watch.
    3 Jun 2012, 07:18 AM Reply Like
  • buyitcheap,


    not sure why you think getting personal gives you more credibility. I think 13 years of experience is nothing to laugh at, but ultimately it depends on whether you are profitable or not. That may be after 2 years, or 5 years, or never.


    If you're profitable, more power to you. I personally try to forecast as little as possible, but if your forecasting works out for you, then that's a good thing. I'll most likely resurrect my blog shortly. I'm not interested in having a fight here online - that's a total waste of time for everyone involved. Good luck in the future with your investments.
    3 Jun 2012, 09:57 AM Reply Like
  • Bill Gross of PIMCO is reducing UST exposure warned that the higher risk and lower quality of U.S. Treasuries could spur investors such as China and firms like PIMCO to drop them for more profitable investments such as commodities and real assets, a move that could disrupt the "current dollar-based credit system.We agree and favor (NEM) 3%dividend and growth that outperforms treasuries by hundreds of % if you back test it comp graph it v. ( for 5 years. ( is the pure play also crushes bonds & USD ( over time. ( riskiest for traders we bought big 2 weeks ago @ $7.99 up 39% to date.
    2 Jun 2012, 03:20 PM Reply Like
  • I have been eyeing gold and gold miners, but the later took off by 20% or so in the last week. Agree they were very oversold (and I thought it was an indication that the entire market will also follow but not so far) but when I look at 2008/2009, all of them got clobbered with the rest. What that 3% can do if that happens?
    2 Jun 2012, 03:54 PM Reply Like
  • Hopefully gross doesn't get burned this time around
    2 Jun 2012, 11:35 PM Reply Like
  • Just sit in cash for now and start buying low-risk, high-yield equities/MLPs/REITs (and/or dividend growth stuff) when the VIX hits 50 or so. No harm in sitting in cash for awhile and letting the market come to you.


    Once 30-year mortgages hit 3%, rental real estate in selective markets (college towns) should also be a good play.
    2 Jun 2012, 04:01 PM Reply Like
  • JP excellent strategy, anywhere there's significant shortages of dorm housing at any university town will provide nice returns.
    2 Jun 2012, 07:28 PM Reply Like
  • Mr. Kessler thinks that this time it's different. A new bond-economy is Bond yields will fall "forever ". lol
    2 Jun 2012, 04:04 PM Reply Like
  • You'll find clowns like him in every market that has experienced decade long bull runs.
    2 Jun 2012, 04:08 PM Reply Like
  • Why do you keep doubling and tripling down on your wrong call and deflecting the fact that you have no clue about what is going on right now?
    2 Jun 2012, 10:12 PM Reply Like
  • Because cash is safer than treasury notes, while the latter yields are negative.
    Are you just a troll, or what?
    4 Jun 2012, 09:25 AM Reply Like
  • Fixed income types are always complaining about the USD and US Treasuries. So why don't you fixed income types invent your own super safe fund/security with a guaranteed 6% return and market it to those that just want to sit on cash? You fixed income types should be crowd sourcing your safest 6% ideas. The small fixed income investor has a huge advantage over the Bill Gross's of this world because Gross has to find something that is safe, liquid and can absorb billions. Bill Gross can whine all he wants to, but the fact is when you want to manage the amount of money he does you are constrained because there aren't many places to go.
    2 Jun 2012, 04:37 PM Reply Like
  • Talk to Japanese bond traders from the late 1990s.


    They, too, laughed at the idea of yields that are welded to the floor for dozens of quarters.


    "Impossible!" they said (in Japanese, of course).


    So...what do JGBs yield now vs. 1997?


    ...and why can't that happen in North America and Northern and Western Europe again?
    2 Jun 2012, 04:46 PM Reply Like
  • The bond markets can stay irrational longer than you can stay solvent ;)


    I like the example of Japan as it shows how dumb dumb-money is. My point: instead of staying in JGBs with paltry yields, Japanese investors should have invested in the Nasdaq from 1990 to 2000 and then have switched to commodities from 2000 to 2008. They would have made 100x their money.
    2 Jun 2012, 05:13 PM Reply Like
  • Yes, and then in 2007 they should have shorted subprime to make 300x their money. And then in march 2009 they should have bought Apple stock to make 1000 x their money.


    Why didn't they just do this? So easy. People are so dumb.
    2 Jun 2012, 06:55 PM Reply Like
  • But so what if it does? The problem with buying a yieldless bond isn't just that it can't appreciate, it's that you also get no yield. There is zero upside, zero income, and nonzero risk, making it a mind-bogglingly bad investment even if nothing bad happens. Your best case outcome is the same as not buying the bond at all, so you have nothing to lose by not buying it and something to lose by buying it. It is strictly irrational to own such an asset.
    2 Jun 2012, 09:06 PM Reply Like
  • It will happen. HIde your debts; lower your interest rates. It's the new long-term deflation strategy. When we wake up we'll still be asleep.
    2 Jun 2012, 11:52 PM Reply Like
  • Yup, it will happen. New economy is here. It's the new long term strategy. Yields will go lower forever.




    I love these SeekingAlpha replies. They're EXACTLY the same arguments made for tech stocks in 1999 and housing in 2006!!
    4 Jun 2012, 09:28 AM Reply Like
  • Since when do low yields forecast low profits??? Data please
    To support please....
    2 Jun 2012, 05:14 PM Reply Like
  • Low yields forecast global depression. Low yields forecast a stock market catastrophe.


    If the world is sunny and everyone is going to be making money hand over fist I should get at least 7% on bond, because I could get that easily in stocks.


    If investors jump at the chance to get 1% in 'safe' bonds, they are saying they like the safety feature more than the risk in stocks and real estate.
    2 Jun 2012, 11:55 PM Reply Like
  • Cash is safer than bonds. Also considering the fees you have to pay to buy the bonds and the negative coupon on bills/notes.
    4 Jun 2012, 09:30 AM Reply Like
  • "Low yields forecast low profits"


    I don't see any logical connection here.
    2 Jun 2012, 08:32 PM Reply Like
  • You've gotten used to having it both ways: when the Fed forces down rates and pays to have stocks go up. But this can't go on for ever. The Fed is now churning its balance sheet (operation twist) because they understand it's too big. The Fed doesn't need to be the buyer of last resort in Treasuries since now all the money in Europe is flooding into US Treasuries.


    But see what happens to stocks when the US Dollar has no Euro as competition -- stocks collapse. Stocks have become anti-Dollar plays; when the Dollar sinks, stocks, commodities, housing prices (?) rise or are stabilized. Ben's plan all along was to sink the Dollar and reinflated the DEBT BUBBLE. But he's been checkmated.


    Now we get to follow Japan's trail into the Black Forest.
    2 Jun 2012, 11:58 PM Reply Like
  • Anyone who can show empirical data that banks leverage 20-1 via the Fed and make "record profits" (which isn't showing in their earnings reports) I would love to see it. The sheeple love to tout this nonsense as fact, but in reality it is just the mob railing against the powers that be (which is entirely justified.)
    2 Jun 2012, 11:55 PM Reply Like
  • There is a fear-driven bubble in government bonds. The tiny yields these instruments offer simply do not make sense. Investors appear to be intentionally losing money, paying the governments of certain countries (Germany, the U.S.) for the privilege of lending money to them for extended periods of time. I assume that many purchasers of these bonds are aware of this, but perhaps are motivated by the intention of unloading these instruments at even higher prices on other investors, instead of holding them to maturity (i.e., the "greater fool" theory). If interest rates spike, the value of the longer duration bonds would be CRUSHED (and not just because the US in particular would then find it next to impossible to service its debts!!).


    As to the issue of "deflation", ok deflation is possible, for maybe one or two quarters. Over the 10 year maturity of a 10-yr T-bond or the 30 year maturity of a 30-yr T-bond, deflation is highly unlikely. An investor who holds the longer term "safe haven" bonds to maturity would be eaten alive by inflation coupled with a subpar yield.


    It will be interesting to see how this all develops.Like all bubbles, the ending will not be pretty.
    3 Jun 2012, 01:46 AM Reply Like
  • Imagine a Japanese housewife stuffing her life savings into JGBs in 1991 after the NIkkei crashed.


    She is STILL laughing all the way to the bank.


    The same will happen here. Mark my words.
    3 Jun 2012, 04:27 PM Reply Like
  • If you bought a 20-year JGB at the beginning of 1991, after 1990's steep stock price declines, you got a yield right around 7%, and when you got your principal back last year it still had a decent fraction of its purchasing power (about 96.7% according to the JCPI, but only about 48.7% according to the IMF's commodity price index adjusted into JPY). Not a stunningly great outcome, but a modest positive return, very fair for what was at the time a low-risk investment: Japan's debt-to-GDP ratio was a reasonably healthy 67%.


    Today's 20-year US Treasury bond yields 2.13%. If you suppose that its yield will decline to match Japan's current level of 1.63% in the next few months, you will walk away with a nominal profit of about 7%. If you hold it to maturity, as our hypothetical Japanese investor did, do you really believe you'll be getting much purchasing power from your principal? The best you can hope for is a Japan-like slow decline in the dollar's value. The US government debt to GDP ratio today stands at 103%, a level that suggests extreme danger especially given its rapid growth.


    It's very obvious that there is no comparison between buying a 20-year JGB in 1991 and buying a 20-year US Treasury today. The risks are much greater and the potential returns much lower regardless of whether one intends to trade or hold to maturity. If the United States owed 35% less money and had a balanced budget, and the market offered me a 7% yield, I might think about it. Even so, I probably wouldn't buy it; while yesterday's Japanese investor benefited from the relatively slow decline in the value of the yen, I do not believe the future looks that rosy for the US dollar. Even if I did, however, the current yield offers no meaningful opportunity to profit and plenty of ways to lose big. You may choose to laugh all the way to the bank, but the joke's likely to be on you. Even if you're right and interest rates remain historically low for 20 years and you're paid as promised, you'll still make a very small nominal profit and lose quite a lot of purchasing power. That's pretty much the best-case outcome for you, so I don't even need to consider the other possibilities to know it's a bad investment.
    3 Jun 2012, 06:10 PM Reply Like
  • 1. The dollar WILL lose purchasing power as it always has.


    2. I was comparing the JGB with the performance of the Nikkei not U.S. Treasuries.


    3. Perhaps another decade of extremely low yields will be great for equities but I doubt it. Baby boomers want yield not equity risk.


    4. Ben Bernanke has proven that he would eat a man's face before he would allow the target inflation peg to increase.


    5. I see no reason why China, Japan, Europe and the Arab oil powers will stop buying U.S. Bonds in the foreseeable future.
    3 Jun 2012, 06:30 PM Reply Like
  • This also means that mortgage rates may fall well below 3% in the future.
    3 Jun 2012, 03:20 AM Reply Like
  • What is your name?


    Bond, US Bond


    3 Jun 2012, 11:41 AM Reply Like
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