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A pretty fair Bond King of his own, Jeff Gundlach simply explains why Bill Gross is wrong about...

A pretty fair Bond King of his own, Jeff Gundlach simply explains why Bill Gross is wrong about bonds selling off at the end of QEII: QE is inflationary, which is bad for bonds, therefore the end of QE has to be deflationary, which is good for bonds. The charts make it difficult to argue otherwise. Did anybody actually sell Treasurys based on Gross?
Comments (15)
  • spald_fr
    , contributor
    Comments (2686) | Send Message
     
    This new editor of Market Currents is doing a terrific job.

     

    Great topics and plenty of them. I particularly like the last item of the night which usually generates a lot of discussion.

     

    Thank you, Market Currents Editor.
    14 Apr 2011, 12:37 PM Reply Like
  • SA Editor Stephen Alpher
    , contributor
    Comments (539) | Send Message
     
    Thanks from the whole team!
    14 Apr 2011, 01:04 PM Reply Like
  • bbro
    , contributor
    Comments (9167) | Send Message
     
    Interesting...Pomo disappears and Bond prices are supposed to go
    up....so the Fed is going to make money on its trades???
    14 Apr 2011, 12:46 PM Reply Like
  • Tack
    , contributor
    Comments (12442) | Send Message
     
    The effects of end of QE are not as simple to assess as the author implies. Yes, any reduction in money printing should be favorable, as regards the implied inflationary effects thereof, but, at the same time, the Fed/Treasury has been using QE in conjunction with ZIRP to create artificially-low short-term rates and a steeper yield curve. The abatement of those programs should see offsetting pressure for short-term rates to climb.

     

    So, the net effect, and the market's reaction to such developments, is probably not so simple to gauge.
    14 Apr 2011, 12:49 PM Reply Like
  • CharlieM
    , contributor
    Comments (150) | Send Message
     
    Tack,
    I agree with you on this. I have been looking back through history to try and find similar conditions to the current Fed actions and I am finding little. These ARE some very unchartered actions by our Fed.

     

    I have been trying to weigh the effects of the ending of QEII and it's effects in terms of bonds and market movement. Given the obstacles the economy is running into in the near future with Debt Ceiling, Budget and commodity costs I find a radical mix of possible directions things could go.

     

    I would REALLY like to see a thread that will address this.
    14 Apr 2011, 12:59 PM Reply Like
  • Tack
    , contributor
    Comments (12442) | Send Message
     
    Charlie:

     

    Here's my own guess, as to what may happen if QE ends, as seems likely.

     

    There's been so many claims that the "market" (by that, I assume they mean equities) has been inflated and/or held up by QE. The "cw" in some quarters is that if QE is taken away, markets plunge. I think this will prove misguided, save for some momentary hysteria, if even that. It should be remembered that ending new QE doesn't mean that all the old QE money has suddenly disappeared.

     

    What appears to be overlooked is that the apprehensions about inflation (which has mostly proved muted, so far) have led to a huge speculative rally in oil, gold and commodities. The effects there have been even more profound than any direct effects on equities and, in fact, have come at the expense of investment in equities. If QE terminates, there will be considerable money coming out of these speculative positions, I predict. And, that money will have to go somewhere. With Treasury and other high-grade bond and cash rates still very low, and subject to upside moves as the economy further recovers, it will not seem very appealing to place money at the opposite end of the risk spectrum from commodities, i.e., Treasuries, high-grade bonds and cash.

     

    Therefore, I expect to see money will flow into a combination of floating-rate debt, convertible bonds, high-yield entities and equities. Initially, some of these flows may be offset by people withdrawing cash, who believe the economy will fail, but this phenomenon is likely to be very transitory, as it becomes clear that QE isn't as earth-shattering as apprehended.

     

    One of the reasons why the elimination of QE will have muted effects on business, assuming that ZIRP disappears long with it, is that banks will then have to find productive uses of the large cash surpluses on their books, and if short-term rates begin to rise, they'll be inclined to be more aggressive in their private-sector and consumer lending.

     

    In summary, I believe that QE's end will be far less wrenching than feared and may, in fact, turn out to be stimulative to private-sector activities, rather than being a depressant.
    14 Apr 2011, 02:02 PM Reply Like
  • Duude
    , contributor
    Comments (3339) | Send Message
     
    I don't know. It seems to me very short treasuries will have little problem with just a little bump in yield. Its 5, 10, and longer treasuries that will lose the most. If that wasn't the case the Fed would find no reason to buy up our supply in the first place. How high rates will need to climb is dependent upon the strength of the dollar at that time. If its weak, rates will have to rise higher to compensate for the added risk for parking foreign capital. Let us not forget our two largest owners of US treasuries are now reluctant buyers.
    14 Apr 2011, 02:18 PM Reply Like
  • CharlieM
    , contributor
    Comments (150) | Send Message
     
    Tack, Duude and Guardian,
    Thank you for your replies to this inquiry. You all have given some support and possible changes I have not given enough thought to.

     

    My take/read on these comments and my own personal beliefes are that the next 2 quarters may be VERY choppy and even suffer a little downturn as many will convert to cash or precious metals to wait and see what the effects are. Too we have an approaching election cycle that has always driven markets into uncertainty. I am adding to cash reserves through outside additions and in the rare case of a position sale. Overall I am not adding to my positions at this time. I am heavy in sound dividend stocks and will stay that way so long as they continue to pay a sound dividend without expecting increases.

     

    I recently bought 2yr T bills at a nice rate. I am debating a sell or hold on them.

     

    Thank you all for your thoughtful replies to the query I posted.
    Charlie M.
    14 Apr 2011, 02:59 PM Reply Like
  • Guardian3981
    , contributor
    Comments (1865) | Send Message
     
    Generally, the most capital flows into the least risky assets first and then correspondingly decreasing levels into more risky assets. The Feds QE2 essentially shut the door on Treasuries so that more capital flowed into risker assets. Once the door is open again what will happen?

     

    I tend to feel alot of it is going to depend on what can keep or gain momentum. Even if you feel treasuries are a bad investment, nonetheless there will be at least some capital that returns to them and leaves other areas. Through exiting say commodaties or equities unless its replaced by sideline money concurrently, then the risky assets while likely experience some depreciation. Its possible this creates a scare and then creates a snowball effect where more people leave risky assets at an increasing rate.

     

    This is what I would say is most likely to happen based on history. However the market has evolved as evidenced by the record highs in gold and silver despite lacking inflation (at least compared to the 70s/80s).

     

    My guess is alot of people will go into cash before QE2 and we will see a dollar rally. I think the Fed is counting on this which is why they are not overly concerned about inflation.
    14 Apr 2011, 01:06 PM Reply Like
  • enigmaman
    , contributor
    Comments (2686) | Send Message
     
    Past and present QE stimulus doesnt immediately stimulate economic growth and or inflation, both take time to manifest themselves, From what I can gather JG is only looking down the straight road as far as he can while Im thinking BG is doing the same as well as trying to peer around the next bend. One sees blue skies the other possible stormy weather.
    14 Apr 2011, 01:12 PM Reply Like
  • tigersam
    , contributor
    Comments (1711) | Send Message
     
    You need two to tango. There is always a buyer for each seller.
    14 Apr 2011, 02:03 PM Reply Like
  • Guardian3981
    , contributor
    Comments (1865) | Send Message
     
    I think a good place to invest is floating rate funds. They can't go much lower because interest rates are already records lows, but they can go higher if interest rates rise.

     

    Its somewhat win win. You may be able to get more yield elsewhere but its also alot riskier. Floating rates will give you income if rates stay the same and more income if rates go up.
    14 Apr 2011, 03:07 PM Reply Like
  • Tack
    , contributor
    Comments (12442) | Send Message
     
    Guardian:

     

    Yes. Many flaoters are selling at or near interest-rate floors, so they cannot have yields adversely affected by any downward movements in market rates, as unexpected as that may be.
    14 Apr 2011, 03:10 PM Reply Like
  • Guardian3981
    , contributor
    Comments (1865) | Send Message
     
    I keep debating what to do with my muni positions. I bought at the end of the selloff in Jan and have made about 8% plus dividends. They appear to be consolidating, but at some point they will either trend up or further down. I tend to think with inflation concern they are headed down since they have longer dated maturities but the contrarian in me says they could rally anytime now.
    14 Apr 2011, 03:28 PM Reply Like
  • ph38
    , contributor
    Comments (2) | Send Message
     
    I'm new to this forum. You have the Fed holding 2.5 Trillion and currently buying most treasuries issued. At the end of QE2 the unwind begins - no doubt the Fed will unwind over years or risk crushing the bond market. Therefore, the inflationary potential from the injection of 2.5 Trillion of new money into the US economy will continue to filter into the market, given that the Fed can't soak up all that stimulus that quickly. Despite the Fed's expected slow unwind, the markets will front run the Fed by selling/shorting bonds to accelerate the drop, generating a transfer of wealth where the Fed loses money and the private sector wins it. I think few will step in front of that bus by leaving commodities for treasuries. It is also important to note that the unwind eliminates the electronically printed dollars which have largely flowed into commodities so that money will disappear, not seek alternatives like bonds or stocks.
    18 Apr 2011, 09:08 AM Reply Like
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