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Long-term Treasury yields climb to their highest level in a month, the 10-year up 5 bps to...

Long-term Treasury yields climb to their highest level in a month, the 10-year up 5 bps to 1.62%, the long bond up 6 bps to 2.72%. A bit has been made about the divergence between stocks and Treasury yields - perhaps it will be resolved through falling Treasury prices, rather than lower stock values.
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Comments (18)
  • Van Hyder
    , contributor
    Comments (168) | Send Message
     
    If treasuries started to sell off in a big way could the Fed increase it's balance sheet (QE3) without making an announcement? I know they can but could they and have any credibility left?
    7 Aug 2012, 09:28 AM Reply Like
  • Tack
    , contributor
    Comments (13542) | Send Message
     
    VH:

     

    Why would the Fed institute QE if Treasuries sold off? That will be stimulative in and of itself.
    7 Aug 2012, 09:46 AM Reply Like
  • chopchop0
    , contributor
    Comments (3526) | Send Message
     
    Tack: In order to keep yields low
    7 Aug 2012, 09:55 AM Reply Like
  • Van Hyder
    , contributor
    Comments (168) | Send Message
     
    Thanks Chop, exactly.
    7 Aug 2012, 10:07 AM Reply Like
  • Tack
    , contributor
    Comments (13542) | Send Message
     
    chop:

     

    Hopefully (but, I'm not sure) the Fed will remember that their original mission was to take actions that would support the currency and the economy. Low rates were supposed to be a means to an end, not an end in and of themselves.

     

    When money starts to flow out of rather non-stimulative Treasuries and into more productive uses, this will be beneficial for the economy. And, as I have been arguing for more than a year, now, higher rates will stimulate the economy, not slow it down. Borrowers will be motivated to make buying and borrowing decisions if they perceived higher rates looming, and lenders will get more interested to lend, as rates move higher. It's a win-win. (P.S. Higher rates only slow economic activity at levels many percentage points higher than presently, so this should not be a concern.)

     

    So, what the Fed should do is exactly what they have been doing lately: sit on their hands. Unwinding Twist would be good, if they must act.
    7 Aug 2012, 10:11 AM Reply Like
  • Van Hyder
    , contributor
    Comments (168) | Send Message
     
    Tack - you'll get no argument from me on your points but if the Fed's stated goal is to hold rates down and they can't seem to accomplish that goal it seems like they'll do anything to perpetuate the illusion that they have everything under their control. I don't think QE3 is likely but I was just wondering out loud if they would do it and tell the markets they did several months after and what that would mean for their "open and honest" stance?
    7 Aug 2012, 10:16 AM Reply Like
  • Tack
    , contributor
    Comments (13542) | Send Message
     
    van:

     

    Personally, I have been saying in SA ever since last August that the Fed would not issue QE3 and had no intention of doing so. Bernanke's own words were often ignored. Lately, I interpret the Fed's "conciliatory" words, obliquely mentioning support, if needed, as merely verbiage, with little intention to offer QE3 unless a serious economic downturn was clearly evidenced, not a little softness.

     

    In fact, I would posit that the markets would receive new QE with serious dismay. The market would see QE as confirmation that the Fed expected bad economic developments, and it would sell off briskly.

     

    Bernanke can give all the speeches he wishes, but he should just do nothing.
    7 Aug 2012, 10:26 AM Reply Like
  • bbro
    , contributor
    Comments (9832) | Send Message
     
    Let's see 10 year today at 1.62% on July 25 it was 1.43%...duration 8.93.....so 8.93x .19 = 1.70%....that's a quick wipeout of a years worth of interest...
    7 Aug 2012, 09:30 AM Reply Like
  • jwbrewer
    , contributor
    Comments (317) | Send Message
     
    If rates are going up, convexity is going to be a real pain in the arse.
    7 Aug 2012, 10:35 AM Reply Like
  • Tack
    , contributor
    Comments (13542) | Send Message
     
    jw:

     

    Yep, and happy days for equity investors.
    7 Aug 2012, 10:36 AM Reply Like
  • jwbrewer
    , contributor
    Comments (317) | Send Message
     
    Tack:
    True, but I was thinking about the balance sheets of the financial institutions who acquired a large amount of govt, corp and agency debt in recent years.
    7 Aug 2012, 10:44 AM Reply Like
  • bbro
    , contributor
    Comments (9832) | Send Message
     
    Different time but,,,,10 year treasury April 1954 2.39%...10 year
    treasury April 1959...4.12%...S&P 500 April 1954 28.26 April 1959
    57.29..up 102%
    7 Aug 2012, 10:52 AM Reply Like
  • GaltMachine
    , contributor
    Comments (1144) | Send Message
     
    bbro,

     

    Surely you don't calculate this stat for equities in the same way as this, do you? You could use the same argument for anybody accumulating stocks at the peak in 2007.

     

    Anybody accumulating a bond portfolio over a long period of time has obviously created a blended portfolio that has benefited greatly from the fall in yields in the past 3 years.

     

    Amazingly we had a nearly 4% treasury not that long ago so the total return on that would be quite satisfying if you sold right now.

     

    Look at TLT, LQD, or Muni's or just about any bond fund y/y and you have done fine. Bond funds mark to market but anybody holding an actual bond doesn't have to take a loss.

     

    This is definitely a dangerous time to be a Treasury investor but it has been richly rewarding year over year and ytd.

     

    If you want to book a profit now, I wouldn't be against it but no one ever went broke taking a profit.
    7 Aug 2012, 11:02 AM Reply Like
  • bbro
    , contributor
    Comments (9832) | Send Message
     
    A lot of people have diminished their returns by cutting their profits too
    early....you need your profits to be outsized....also I am just throwing out the data...you decide if it is worthwhile...
    7 Aug 2012, 11:13 AM Reply Like
  • GaltMachine
    , contributor
    Comments (1144) | Send Message
     
    bbro,

     

    The duration calculation you provided is extremely valuable. I appreciate it.

     

    I don't think people quite get the concept of duration when it comes to valuing a bond but it is definitely a powerful tool in the investor's arsenal especially at these measly yields.

     

    A wholesale rotation into bonds now would be a dangerous activity which is another reason why ZIRP is such a crime.
    7 Aug 2012, 11:24 AM Reply Like
  • DaleW
    , contributor
    Comments (67) | Send Message
     
    Most of those purchases are held to maturity. If its traders they hedge or dump quickly.
    7 Aug 2012, 12:44 PM Reply Like
  • chopchop0
    , contributor
    Comments (3526) | Send Message
     
    "perhaps it will be resolved through falling Treasury prices, rather than lower stock values."

     

    Duh, the treasury bubble is so painfully obvious
    7 Aug 2012, 09:33 AM Reply Like
  • jwbrewer
    , contributor
    Comments (317) | Send Message
     
    Markets may not have had a QE3, but they did get a pretty nice repo from the Fed for 600 million.
    7 Aug 2012, 10:37 AM Reply Like
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