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Wilbur Ross has a message for bond investors: "If the 10-year Treasury reverts back just to its...

Wilbur Ross has a message for bond investors: "If the 10-year Treasury reverts back just to its average yield from 2000-2010 [you will lose] 23%." Speaking on CNBC, he says investing in long-dated Treasurys will be a "huge risk" over the next two years. By contrast, Ross says stocks do not seem grossly expensive.
Comments (8)
  • This is a ridiculously simplistic way of viewing the situation. In the interview, he later says that he's encouraging his portfolio companies to borrow as much as possible. This is exactly why the 10 year and 30 year yield will eventually go much lower. There will be another corporate credit blow-up as many of these companies issuing junk and leveraged loans simply do not deserve credit. While the manic risk environment has allowed them to refinance indefinitely, if and when the US goes into recession, these companies will no longer be able to refinance the debt they should never have gotten in the first place. Once that debt blows up, investors will pile in to government bonds again, especially as the Fed will likely step up QE yet again, and inflation remains non-existent.
    22 Mar 2013, 11:12 AM Reply Like
  • I agree that long term treasuries are huge risk, and the stock market is undervalued, but they are not disconnected. When long term rates rise, which they will eventually,what will happen to equity markets? When rates are as low as they are now, the slightest tick up or down can have a big effect on both equities and treasury/bonds. Since rates are inverse to value, the Fed has created a monster. The Fed is holding down rates, like a kid in a swimming pool holding a basketball underwater. Were all addicted to cheap money and liquidity. When the Fed finally lets rates rise even a couple of basis points, it may panic the bond market *and* the equity markets, as some institutions pull money out of equities to cover their losses in treasuries. They will put that money wherever they percieve safety - who knows maybe it will be the Swiss Franc again, or Gold. IMHO, that is the risk to equities. If QE is maintained in perpetuity, the resulting liquidity flows into equites as a percieved value (as planned). In real dollars, the equity markets really *are* still below where it was in 2000, but the world is full of unforseen risks.
    22 Mar 2013, 11:21 AM Reply Like
  • To Anathan Thangavel:

     

    I do believe your logic is backwards. Ross is EXACTLY on point is encouraging his portfolio companies to borrow as much as they can given the the Fed's maintenance of artificially low rates. The capital market objective is to borrow as much as the market will lend at the lowest (and hopefully) fixed rates you can. It's simply all supply and demand. Increased demand, given a fixed amount of lenders will start to drive up rates; but we remain in a situation where credit buyers still have a positive carry and remain less sensitized to credit quality. when lenders start to become much more quality sensitive, borrowers will have to pay more, it's as simple as that. And, you are right about one thing: when companies start to blow up, the credit windows will either close and/or the cost of borrowing will greatly ratchet up. Human behavior virtually dictates that credit booms and busts will continue...
    22 Mar 2013, 11:31 AM Reply Like
  • Yeah, Ross is exactly right as usual. You simply don`t BUY debt at all time highs for a long term hold but you do SELL debt at or near all time highs whenever possible and in size too.

     

    Basic stuff...
    22 Mar 2013, 01:05 PM Reply Like
  • Ananthan, I agree with you. Wilbur Ross was parroting the same mantra that we are hearing across Wall Street, that interest rates are so low they can only go up from here and that equities represent far better value. This belief is so universal on the Street today, it is almost treated as a given. It is far from a given. In fact, i think it is 180 degrees wrong. It is based on a faulty assumption that all the money creation is going to soon lead to inflation and a reversal in Fed policy. Some day that will be the case but before we ever see that we are going to be dealing with a global deflationary bust that will send the equity markets spiraling down and push interest rates to even lower lows. I think the ten year yield will fall to 1/2 of 1% later this year while the S&P falls to 500. And yes we will see an implosion of the junk market. Wilbur Ross, Warren Buffet, Lee Cooperman and Ray Dalio and so many others have become nothing more than consensus thinkers these days, particularly with respect to the bond market and interest rates. I think a lot of it has to do with the fact that we haven't seen a deflationary cycle in 70+ years so most investors are failing to factor that into their thinking. I suspect that before this year is out, it will dominate everyone's thinking as we will be knee deep in the bust.

     

    rooksmith, it won't be higher interest rates that will send the equity markets lower. It will be sharply lower earnings as a result of a severe global downturn. I expect earnings on the S&P to fall below $50 in the next 12 months. That's what will drive stocks lower.
    22 Mar 2013, 11:58 AM Reply Like
  • The currencies seem to hold the key to stocks and bonds. It now appears the US long bond will move toward 144-147. The dollar will move toward 84/87. Gold will decline into the 1530 area (but miners will be the value buy) and overall the bonds will hold on lower rates while the Quantitative easing is pressed worldwide. This the path of the currency wars and it will hold for some time. Mr. Ross is right to sell debt today because he can pay it back later with inflated money, but he is too early to call for higher rates. No economy today can afford higher rates so they create money.
    22 Mar 2013, 12:17 PM Reply Like
  • I understand Mr. Ross's point, but he is wrong. Investors that buy 10yr Treasuries will get their money back in 10yrs plus interest. Guaranteed by the issuer of the currency. No one in US history has ever lost a penny buying Treasuries and keeping them to maturity. They may not like their interest rate, and the book value might fluctuate, but they will not lose money. Investors who buy ETFs like TLT and EDV which are not treasuries but speculative treasury derivatives with no final maturity date will not be as lucky if the rates move up. But, if rates go down further they will gain.
    22 Mar 2013, 06:45 PM Reply Like
  • We have invested alongside Mr. Ross a number of times and were happy with the outcome that he caused in each case.

     

    If he is correct here, this is one way to exploit for profit:

     

    http://seekingalpha.co...
    24 Mar 2013, 05:29 PM Reply Like
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