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- Treasury Bonds: The Short of the Century [view article]
- Packaging Inflation-Linked Bonds [view article]
- ETF Update: Bond ETFs, Foreign Currency ETFs, Mid-Cap ETFs [view article]
- TIPS Traders Not Buying Latest CPI Data [view article]
- Two Trades for 2008: Subprime and TIPS [view article]
- WIA: A TIPS Fund for the Conservative Investor [view article]
- First Global TIPS ETF Hits U.S. [view article]
- Expect a 1% Cut From the Fed [view article]
- Why You Should Worry About Negative Short TIPS Spreads [view article]
- On Money Aggregates, Asset Prices, and Low Quality Trades [view article]
- Does the Yield Curve Point the Way for Stocks? [view article]
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- Treasury Bonds: The Short of the Century
- Packaging Inflation-Linked Bonds
- New TIPS Inflation Gage Index Launches: Is an ETF Next?
- ETF Update: Bond ETFs, Foreign Currency ETFs, Mid-Cap ETFs
- TIPS Traders Not Buying Latest CPI Data
- First Global TIPS ETF Hits U.S.
- Expect a 1% Cut From the Fed
- WIA: A TIPS Fund for the Conservative Investor
- Why You Should Worry About Negative Short TIPS Spreads
- Does the Yield Curve Point the Way for Stocks?
- Full List of Articles »
Treasury Bonds: The Short of the Century [view article]
Interesting take. I believe that investors are just truly confused and uninformed. How could you possibly predict how to short treasury bonds when investors actions are not corresponding with market signals. When the Fed makes statements that they will be tougher on inflation, yields shoot up. When the opposite happens, yields go down. this is exactly the opposite of what should be happening.Check out this article for a more in depth analysis of what investors are doing and how they are getting screwed by the treasury bonds, which off a lower return than current inflation levels.
www.greenfaucet.com/bo... Reply
Bottle
Treasury Bonds: The Short of the Century [view article]
I stand factually corrected on both cases and also stand 100% behind the logic and resonablensess of the conclusions of the article:- Tips are pegged to CPI-U which includes food and gas. Please note that this is in no way central to the arguments in the article. I stand by the main argument that inflation is not accuratelly measured for the several reason pointed, and that the focus on core inflation (which is systematically tauted byt the FED and in the media) MAY (I repeat MAY) have some impact on investors perception of inflation and therefore the required return on their bond investments. This just one a several arguments provided and not the main one by any means.
- In the example provided where I mention duration it should read maturity. Maturity is a VERY rough approximation of the sensitivity of a bullet bond price to interest rates (it has the advantage of being very intuitive which is good for an article of this nature); in longer maturity bonds it does differs samewhat from duration.
Duration (McCaulay Duration) as you point out needs to take into account not just the principal repayment but interest coupon; it is the sum of the cash flows discounted by the yield multiplied by the time cashflow divided by the price of the bond (i.e a PV wighted average maturity). In this case, assuming a 4% coupon and that the bond trades at par it would imply a duration of about 8.4 years, and therefore an estimated change in the price of the bond of 25.2% rather than 30%.
Off course Mcauley duration is also an approximation, to be more precise one should use modified duration and to be even more precise one should use convexity, so you can decide how precise you would like to be. The numbers were used to give an idea of the order of magnitude and this in no way changes the merits of the argument, I believe.
Thank you for adding precison to the discussion.
With regards to the second comment (by "djzvue") on the use of leverage, I just wanted to clarify that he must have misread, on the contrary I did NOT recommend the use of leverage and did in fact highlight the increased risk of levergage in such a trade.
Reply
Treasury Bonds: The Short of the Century [view article]
The duration of a T-note is NOT equal to its nominal maturity unless the bond has zero coupon. Coupled with the error about the inflation rates used for TIPS, one concludes this is a poorly researched article. ReplyTreasury Bonds: The Short of the Century [view article]
For TIPS inflation adjustment, the Treasury Direct site notes: "The index for measuring the inflation rate is the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (CPI-U), published monthly by the Bureau of Labor Statistics (BLS)." This is not the core rate; it does not strip out food and energy. ReplyTreasury Bonds: The Short of the Century [view article]
It's important to remember that long bonds are also a place people put their money during flights to quality/away from risk. So, in addition to inflationary pressures, these rates have recently been highly correlated with the broad equity markets. When people feel bullish, they pull money out of fixed income and put it into equities, which drives interest rates up. When markets have bad days, you see the reverse.Another way to play this, by the way, is a new ETF: TBT Reply
Treasury Bonds: The Short of the Century [view article]
your anti-bond argument has been out there for so long that I believe Marc Faber now suspects it is flawed. The analogy of blackhole physics may be more apt now--the destruction of credit and financial systems (so much more than just cyclical falloffs of growth), moving now from housing into commerical credit, pensions, municipalities, etc could be such a powerful destructive centripetal force that the more visible sparkles of inflation (generated by desperate remedies and their effects) still at work on the periphery will in time be sucked in and extinguished. The struggle between these forces seems almost cosmic, the leveraging you recommend highly risky, anything but shooting fish in a barrel. Money mgr Gary Shilling, who has been good on deflation and the bond market in the past, is now saying buy long T-bonds. He's not a theorist but worth listening too. Thanks for laying out your view. ReplyTreasury Bonds: The Short of the Century [view article]
poor timing , i would say. t-bonds will be the short of the century at one point. but not just yet. Inflation isn understated, true. and the printing presses ran way too easy, also true. BUT: the fed hasn't been overly expansive in its monetary policy over the past years, contrary to what many believe and assume. Second, the demographics (retiring baby-boomers) and the deleveraging and asset-deflation that is going on will exert strong anti-inflationary pressure over the coming 2-3 years. We may well see 10-year yields of 2.5-3% before we get a 5%+ print. remember japan? 1-2% long term yields were certainly regarded by many as a 'short of the century', too. but look, how poorly that short has worked out for more than 5-6 years?Shorting t-bonds seems to be the obvious 'surefire' trade these days. a tad too obvious, perhaps?
at the turn of 2009/2010 the time might be right. right now i think it will tie up money for quite some time right now when there are way sexier opportunities to deploy it. Reply
Packaging Inflation-Linked Bonds [view article]
TIPS are baloney because government-controlled inflation measures are baloney. ReplyPackaging Inflation-Linked Bonds [view article]
As long as these securities are linked to numbers published by their own issuers, I'll stay away. ReplyPackaging Inflation-Linked Bonds [view article]
Do rising interest rates, in a rising inflationary environment, have the same negative effect on linkers bond prices, as they do on regular bond prices ??Thanks Reply
Packaging Inflation-Linked Bonds [view article]
The Government should issue a Zero coupon TIP that includes energy and food into the CPI calculation. ReplyPackaging Inflation-Linked Bonds [view article]
Strange you fail to mention that issuers of inflation protected bonds seem to have "odd" notions of inflation rates and how to measure them or how to reflect the inflation in the bond yields. The US for instance finds the TIPS has not real yield and pushes all of the yield into the inflation adjustment which is, interestingly, only 4.2% currently. No one believes that is true on either count. Fictions and fiddling are common if not required to make things appear fair to consumers. Your analysis is not helpful since cheating by governments and manipulation of fiat currency are the rot at the heart of most policy. You reported half, of less, of the story. ReplyETF Update: Bond ETFs, Foreign Currency ETFs, Mid-Cap ETFs [view article]
What about IJH? Does your overlooking of this Midcap suggest anything? ReplyTIPS Traders Not Buying Latest CPI Data [view article]
Here's a post from earlier this year showing/asking if the BLS colludes to dip crude prices just prior to their sample date. Maybe they do the same with gasoline sample data? Why doesn't the media ask if this borders on illegal, if true?www.financialsense.com... Reply
Turtle
Two Trades for 2008: Subprime and TIPS [view article]
Mr. Salmon,Since you pose as a serious professional, I wonder why you don't explain how much purchasing power a TIP's buyer IS LOSING considering that U.S. M3 (inflation) is running now at around 17% a year!
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People, wake up!
Do you know that CPI (some items) is self-adjusting and self-correcting according to people's choices rather than on absolute price of goods?
Are you aware that CPI is bogusly build? Reply