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Interest rates on Treasurys are bound to go up someday, right? Don't be so sure. The bond...

Interest rates on Treasurys are bound to go up someday, right? Don't be so sure. The bond vigilantes have been tamed, and observers note that private holders have been largely replaced by "uneconomic" buyers who will hold bonds at any price: "The single biggest mistake that smart people have made over the past few years is assuming that interest rates have to go up."
Comments (19)
  • as the guy who put Greece on the map long before it was forking over 100 percent on its debt i think your celebration is beyond premature here. In fact your "linear view" on price is quite the spectacle in the world of finance. having said that i do agree TREASURY rates could remain at "free levels" for quite some time. Numerous bankruptcies loom however "in order to protect the contracts signed" of course. this will cause interest rates to soar at the state and local level going forward. unless you're the Upper Midwest of course.
    9 Jun 2012, 09:52 AM Reply Like
  • In addition to the author's very good point about price insensitive foreign holders buying treasuries to prop their currencies, stock market jitters and the recent real estate collapse are in the minds of many folks which has caused a long term re-allocation into fixed income which is likely to persist even if times are good.


    Major players pushing the market around in an age where this information is highly visible to all participants makes folks wary as well.
    9 Jun 2012, 09:55 AM Reply Like
  • Rates for government paper in all the PIIGS were all low ...until they weren't.


    It will be the same way here. The change can come like a lightning bolt leaving no time for people to change course without having already suffered huge damage.


    To all those who plan to exit before this happens...


    Caveat Emptor.
    9 Jun 2012, 10:03 AM Reply Like
  • We can print our own currency, the PIIGS can't.


    England and Japan are much more relevant comparisons.
    9 Jun 2012, 10:21 AM Reply Like
  • and Switzerland and Germany as well...
    9 Jun 2012, 10:24 AM Reply Like
  • can't print taxpayers tho. Can print tax cheats tho!
    9 Jun 2012, 10:32 AM Reply Like
  • We are with Bill Gross of PIMCO and Doug Kass of SeaBreeze who think the great Treasury unwinding is in a very early stage.We are up 10% (TBT) scaling in on big dips on market craters.Also made 90% on (NUGT) in at $7 out at $14 in 2 weeks now re-loading. All we need for a stampede out of bonds is one rip your face off rally kind of like Monday.The applicable market saying here:


    "Never Drink Downstream from the Herd"


    9 Jun 2012, 10:12 AM Reply Like
  • Long TBT has broken the hardiest of men...
    9 Jun 2012, 10:28 AM Reply Like
  • Many baby boomers would not live to see interest rates being raised in their life-time.
    9 Jun 2012, 10:18 AM Reply Like
  • The Japanification of the U.S. is here.


    The bull market in bonds may have another couple of decades to go.
    9 Jun 2012, 10:22 AM Reply Like
  • Rates WILL go up "Someday" - the question is when.
    9 Jun 2012, 10:28 AM Reply Like
  • The debate about on what date the Treasury bull market will reverse and head the other way is a rather fatuous one because there is little or no milk to be drained from holding the cow. This is not like holding an agency-mortgage REIT, where they are similarly exposed to adverse effects should rates rise, as they yield 15+%, making their attraction obvious. Why would anybody wish to play chicken with Treasuries, when the lofty reward for such is 1.5% per annum?


    Sure, if one believes that rates can go ever lower and, therefore, capital gains will be attained, more return is possible, but what's the risk-reward curve look like? Bad, that's what. How bad? Well, in just the period between the previous Friday's market sell-off and Treasury yield drop to Wednesday's dramatic recovery, Treasury price changed such that more than an entire year's worth of interest was forfeited in just three days.


    And, even for those that think rates could persist at low levels for years, there remain two further things worth consideration:


    1) At the current record low rates, the principle of convexity elevates dramatically risk to principal of even small moves in rates. A very modest move would wipe out the entire present-level yield returns of a 10-year bond.


    2) Look at the historic yield chart for TNX, then, try to tell yourself that rates will sit immobile for any extended length of time, even three years, much less ten or twenty.


    And, people continue to think, with conviction, that Treasuries, now, are "safe," just as in 1982, they were of equally firm opinion that only a damn fool would buy a Treasury bond at 15% yield. History suggests that opinions formed at such extremes will prove to be unfounded, and likely painful for some.
    9 Jun 2012, 10:47 AM Reply Like
  • Tack,
    Thank you for sharing your European list of stocks with me. I am curious if you are taking position in that list. If not what will prompt you to begin taking positions?
    Also I am curious if by some strange chance we end up in a deflationary environment what would be your investment strategy?
    Thank You In Advance
    9 Jun 2012, 12:41 PM Reply Like
  • User:


    I am presently invested in STD (common, preferreds, short puts), BBVA (common), TEF (common, short puts), REPYY (common), FTE (common), TOT (common). These positions are modest, presently, with STD being the largest. All have room for expansion in size, depending on circumstances.


    I have no pre-existing plan for a deflationary environment, as I see the probability of genuine deflation being allowed to occur unabated, here or in Europe, as essentially nil. If it were to rear its head, obviously, some adjustments to my overall portfolio (50% equity, 25% preferred, 25% debt) would be in order. I can't speculate what those might be, at the present time.
    9 Jun 2012, 01:22 PM Reply Like
  • Bonds locked into low rates is exactly what Bernanke is aiming for (and getting because of the exceptional worldwide US bond liquidity), because there would be no way to bail the US out of its $16T debt at higher rates. As long as inflation can be contained pari passu, even infra-low rate bond holders need not fear to be "eaten alive". And that's exactly what has been happening here, in Europe, and elsewhere: cost conscious consumers have been keeping prices (and corporate pricing powers) in check except for monopolies.


    The fact that (x China) all big govt's are over-indebted provides cover (without the need for cajoling) to the Fed. The PIIGS don't change that, until we become a pig ourselves: the one thing to watch closely (especially on election day!) Until then, like in Japan (though for different reasons), our bond rates may stay in near zero territory for years to come.
    9 Jun 2012, 10:52 AM Reply Like
  • hks:


    I'm going to throw a monkey wrench into your prediction and your logic.


    You state that worldwide liquidity makes U.S. Treasuries so attractive, bringing constant demand to preserve low rates. And, I concur in this moment of global fear, the U.S. has been basking in its usual position of provider of reserve currency and bastion of safety for parking funds. However, liquidity can work both ways, and this situation, vis-a-vis funds flows, could reverse on a dime very easily.


    If and when Europe announces a comprehensive reorganization of its balance sheet and fiscal plan for the future --and, in one form or another, they will -- suddenly, Europe will look comparatively safe and, more importantly, wildly underpriced in its various equity and bond markets, given extreme discounts. The consequence will be an avalanche of funds flows out of U.S. Treasuries and back into "riskier" (they'll be a lot less risky than holding Treasuries) assets.


    When this occurs, the Fed is going to be faced with the choice of allowing rates to move higher or to buy open-market existing securities to try to support a lower rate, all the while trying to buy from the Treasury Department, too. My guess is that in either event, the market will vote with its feet.
    9 Jun 2012, 11:13 AM Reply Like
  • Point taken. Yet, few people (incl. European heads of gov't) believe in a cohesive fundamental restructuring of the Eurozone, (not to mention the EU,) in this generation, that could provide the tools our federal gov't has at its (albeit currently gridlocked) disposal.


    Europe and its PIIGS are going nowhere fast, rest assured, and consider themselves lucky if they can even stabilize the current looming disaster, instead of falling over a cliff. Band aids and more band aids is all they'll be able to muster which will keep coming off again and again. Europe's obstacles to greater econo-fiscal (not to mention political) integration, the prerequisite to fundamental PIIGS integration, go to the basics of sovereignty, peoples' value systems and historical ways of of life. Those will not be changing in a generation or two.
    9 Jun 2012, 12:09 PM Reply Like
  • The creation of the EU basically opened up a humongous charge number for a new breed of bureaucrats. And as you know, bureaucrats are very tight-lipped, very entrenched, and very encroaching. That is what is happening over there now.
    9 Jun 2012, 12:35 PM Reply Like
  • Agreed.


    I keep hearing about how "Europe will get its act together" when, in fact, reality has shown that Europe (as history as shown time and time and time again for nearly one thousand years) is NOT going to get its act together as nationalism (sigh...once again) rears its head and disagreement is the REAL common currency.


    The yen and dollar will continue its traditional roles and the bonds will act accordingly. Look at this chart and try to disagree:

    9 Jun 2012, 07:24 PM Reply Like
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