Ad Hoc Commentary – the lows in yields on UST 10y in 2012 is likely the multi-decade lows
‘Gentlemen prefer bonds’ – Andrew Mellon
The whole generation of gentlemen in fixed income trading desks today belong to the group of gentlemen-prefer-bonds. Just look at the price action of US treasuries and you see that they are programmed to receive rates at every spike. Buying bonds like a Pavlovian dog had paid for the bills, and even more. Why stop now?
Yours truly believe that yields in government securities had reached multi-decade lows in 2012. In other words, the trend that began in 1981 is likely to come to an end this year. The right thing to do in this market is to sell TY call options – selling call options on the price of the bonds.
To be sure, government securities in regions that are facing the sovereign debt crisis are not going to hold its value – Europe, Japan and America. The baton is with Japan now. But take heart, Germany’s elections in September would likely bring back spooky to Europe – this time spooky will visit the core, especially France.
Merkel understands that forcing too much austerity on the PIGS risk civil unrest. However, tell that to the average Germans who repaid in full World War I debts on Oct 3, 2010.
“…Oct. 3, the 20th anniversary of German unification, will also mark the completion of the final chapter of World War I with the end of reparations payments 92 years after the country’s defeat…”
http://www.spiegel.de/international/germany/legacy-of-versailles-germany-closes-book-on-world-war-i-with-final-reparations-payment-a-720156.html
Try telling the average German that they might need to give socialistic France a lifeline. They would probably ask, “Is it the same French of the victorious Allies who made those enormous repatrations demands after World War I?” The elections to watch is Germany in September.
In today’s world, communism has a bad name. By mandating that every man is equal, communism takes out human initiative as there is no hope to get rich. Democracy is likely to follow suit. Democracy fails when the masses vote to confiscate the wealth of the minority. A failed democracy indirectly takes out human initiative as there is no hope to get rich. If you become the next Bill Gates, they will be there to tax it away from you.
“…If you’ve got a business—you didn’t build that. Somebody else made that happen…” – Barack Obama
The attacks on the rich in the regions that are suffering from the sovereign debt crisis are going to ensure that capital will flee. Thus the government debts will eventually be destroyed in Europe, Japan and America. Taxes on the poor is going to increase to continue servicing the debt. The rich will migrate. But yours truly wonder how far can one hide when money goes paperless.
Good luck in the markets.
There is a chance of Italian and German elections both in Sept and alot of angst until then.
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Actually.. if you believe bond yields are at multi-year low(even decade), then all the more reason to just re-invest into short-term maturities everytime you have bonds maturing.
A gradual increase in interest rate will do harm to stocks and real estate and gold and commodities.. everytime except short-term bonds of <5yrs.
Don't you think?
Hi Bondie
There is a new school of thought that, this time, the market could do with a gradual rise in rates which is why the curve is steepening up and the short term maturities net low yields.
Short term rates do spike in events of crises so take note if you are playing on leverage.
Good luck !!!
Do a ddis on any govt bond. You will see that 80% of the borrowing is already in short term paper less than 5 years. The great rotation from long term to short term started with Clinton and accelerated under the QE and twist programs. As we wrote before, QE is nothing but refinancing long tenor into overnight rates.
When you trust govt paper, you are wise to flock to govt paper when rates rise. But when rates rise on fear of default, do you flock there? Real assets will likely not fall when rates rise in a sovereign debt crisis. Maybe gold will fall to the 1400s. It is trying vainly to claw back above 1600 now. But even gold should rally after lonely Paulson advantage realizes that size does matter when you are too big to trade.
In Americas case in particular with fixed rate mortgages, real estate can easily continue rising with rising interest rates. It is like the cooling measures in singapore. When you tighten the lock slowly, all the marginal buyers will rush in to lock in the lower cost. Maybe they think better now or never.
Good luck in the markets.