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…”

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.