Ten Year Bond - 0.86%

[cthulu2016]

The Japanese 10-year bond is yielding 0.86%. Lend Japan $1000 for ten years and get a fat check for $8.60 dollars every year.

In other bond news, the demand for the US ten-year continues to surge. The yield is down to 1.64%.

Yet Bill Gross and Warren Buffet and Alan Greenspan continue to show their faces in public. If your incredibly, wildly wrong pronouncements are in line with the developed (RW) conventional wisdom then being wrong shows your dedication to the prevailing religion and is admirable.

If, however, anyone makes accurate pronouncements that are contrary to the conventional wisdom no amount of evidence will help. They will be perma-wrong, not matter what the facts say.

[unblock]

1. i haven't heard everything each of them has said, mostly that "it's a terrible long-term investment"

which is pretty undeniably true.

the upsize is by definition very limited (only 1.64% before you can't get any lower!).
the interest you earn in the meanwhile is trivial.
the downside risk is huge. eventually, europe will get fixed. whether it's pretty or ugly or takes 6 months or 6 years, eventually it will get fixed, and u.s. treasuries will become MUCH less attractive, and interest rates will rise, and bond prices will fall.
through in some small default risk assuming republicans continue to be idiots about the debt ceiling and you've got the makings of a terrible long term investment.

now, can you make money in the short term on terrible long-term investments? of course you can, and if you've been long bonds you're smiling right now. but at some point you'd better get your money out.

in essence, the bull market in bonds is one of the most obvious bubbles ever, especially given the fed's actions. make your money if you dare, but get out before it bursts.

[girl gone mad]

3. Huh?

Our central bank manages the interest rate. Europe doesn't factor much into the equation, unless you are foreseeing a situation in which Europe's economy comes roaring back and drives up inflation in our economy.

The Fed has no plans to target a higher rate any time soon. Our default risk is nil. Republicans can (and will) be idiots until the cows come home. Our Constitution says that our federal government is obligated to honor all debts, and the President and Treasury have the full authority to do so.

[unblock]

4. europe matters because the bull market in treasuries is largely due to the lack of good alternatives

the central bank doesn't fully control interest rates because, despite apperances, it simply isn't that powerful. it's merely a very heavy player in the market. so it has considerable influence especially in the short-term, but it can't fight the realities of world markets long-term.

so interest rates are low in part because the fed wants them low, but also because investors keep buying up treasuries like crazy. investors have been doing this mainly because every other investment sucks these days. europe in particular is increasingly dangerous short-mid to mid-term, but still has great potential long-term. when europe finally gets their risks under control, one way or another, investors will sell treasuries like mad and invest in europe. or if america can get its act together, investors will sell treasuries like mad and invest in american equities. you get the idea. the fed has an easy time of it right now because no one has any great interest in selling treasuries. but if things look better elsewhere, that could change, and the fed would be reduced to smoothing out the bumps as long rates head higher.

also, some of the recent bernanke creativity notwithstanding, the fed has vastly more influence on short rates than they do long rates. so while they can relatively easily keep short rates near zero, they can't fight the market nearly as effectively if the market wants to dump long bonds.


as for our default risk, it SHOULD be nil, and constitutionally, i agree with you in theory; but in practice,we're dealing with a supreme court and a house majority that puts party and right-wing ideology before country and constitution.

[Zanzoobar]

5. This

High demand, low interest. The moneyed players are interested in principal protection at the moment. There isn't a better bank right now than US treasuries. Anywhere.

[MrMickeysMom]

11. You're right about that...

So, when you can't trust buying T bills anymore, what is left to protect?

[Zanzoobar]

17. If it ever comes to that

I recommend rice, canned tuna, water filters, ammo, whiskey, and tobacco.

[girl gone mad]

8. The central bank *is* that powerful.

They do control rates, over both the short term and the long term.

I've posted a bit about this in my journal. From Ed Harrison:

"The Federal Reserve is a monopolist. The US government, as monopoly issuer of its own currency, has given the Fed monopoly power in the market for base money. The Fed exercises this monopoly power by targeting the overnight rate for money, the fed funds rate.

Long-term interest rates are a series of future short-term rates. All I need to do to mathematically represent any long-term interest rate is smash together a series of short-term interest-rates over the long-term period. For example, I wrote in May 2010 about the five-year bond: “Bootstrapping the yield curve is simply the math used to translate these three-month zero-coupon prices into a series of expected future 3-month interest rates. Doing this would mean we have a full term structure of interest rates every three-months out to five years.”

Here is a quote from Ben Bernanke making essentially the same point, and also addressing how the Fed can manage rates at the zero bound:

"So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure–that is, rates on government bonds of longer maturities. There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time–if it were credible–would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well."

It matters not at all whether investors decide to dump treasuries en masse. The Fed has just demonstrated through QE that they can and will always act as buyer (swapper) of last resort. The Fed could buy back every outstanding bond at 0% if they chose to. ETA: This is why we are in no danger from bond vigilantes.. and any bond trader with half a brain will not bet against the Fed. The Fed is a currency issuer. Wall Street banks are mere currency users and even if they pooled all of their money, they'd always come up short.

As I said in my post, the only risk from Europe is if they somehow managed to generate strong growth and thus drove up inflation. Under that scenario, the Fed would correctly raise rates.

The Constitution could not be any clearer. It both gives the Treasury the authority to mint coins, and states that our debts must be paid. The President would be wholly within his power to either ignore the debt ceiling or use coin seigniorage to retire debts.

[unblock]

9. there are practical limits to the fed's power and bernanke's quote even hints at them

"if it were credible" and "if this program were successful".

up to a point, sure, the fed can crush anyone who tries to mess this it. no doubt it's the 800 pound gorrilla.
but some actions require a 8000 pound gorrilla, and that the fed is not. or at least, it couldn't do it without seriously undesireable outcomes.

for instance, buying up ALL outstanding treasuries at 0% would infuse far too much cash into the economy, and would simultaneously eliminate the treasury, which is an incredibly useful benchmark, safe investment, and a base for creating other investment. the dollar and the financial industry would be in shambles. part of the problem is that psychology is a large part of inflation and this sort of thing would create huge inflation expectations.

[girl gone mad]

21. This is a common misconception.

FOMC operations have nothing to do with monetizing the debt or printing money.

Open Market Operations involve altering the outstanding reserves in the banking system in order to help achieve the target interest rate. These operations change the composition of outstanding private sector assets. No new net financial assets are created in the process and this does not fund the US government.

Monetization is only achieved by act of Congress via deficit spending; only fiscal policy can generate significant inflation in a balance sheet recession. The Fed can try to induce a psychological risk-on environment, but they can't force banks to lend or force people to spend or borrow. The money supply remains constant and productive capacity is stable. In our current environment consumers and businesses are shunning debt and banks are restricting lending. No amount of monetary policy is going to fix our economy or cause high inflation. Buying up all outstanding bonds at 0% (i.e. swapping a higher yielding asset for a lower yielding reserve) would flatten the yield curve but do little else in this environment.

[cthulu2016]

6. The phrase "treasury bubble" drives me crazy.

There cannot be a bubble in any asset that is incapable of offering large returns on investment.

An unlimited upside is essential to a bubble.

Granted, the entire bond trading community of the world could be unanimous in expecting massive deflation going forward, but it is a lot likelier that bonds are being bought for value.

[unblock]

10. the term "bubble" is the appropriate economist's term, notwithstanding the lack up major upside.

some of the informal terms usually associated with bubble, such as "euphoria" would be more inappropriate.

but economists only think in terms of unsustainably high prices, and treasuries certainly fit that, uh, bill.

[cthulu2016]

14. No.

It is not the appropriate economist's term. Not all over-priced commodities are bubbles. Service contracts at electronics stores and popcorn at movie theaters are not bubbles.

A bubble must 1) have a speculative component, and 2) feature trade in high volumes at prices that are considerably at variance with intrinsic values.

Nobody is borrowing money to buy treasury bonds. That's the first clue it isn't a bubble.

Since deflation is a real possibility it is difficult to say exactly what the intrinsic value of a treasury is. It has a deflation hedge value that stocks do not have. And every bond purchase includes a currency play. If the dollar were to rise against other currencies (like the euro when it drops 20% some) then the yield would actually be increasing.

But whatever the intrinsic value, to say that bond prices are considerably at variance with it is a stretch. The implicit predictions in US treasuries are 1) the economy will continue to do poorly and quite possibly get worse, and 2) the US Dollar will hold up better than other currencies in the process.

Neither of those predictions is equivalent to houses going up 15%/year forever, or pets.com doubling in price despite being fundamentally worthless.

[unblock]

20. service contracts and movie popcorn are sustainably high; so, no bubble there.

i suppose it's nearly impossible to prove anything a bubble unless and until it bursts, so i doubt there's any settling this one for a while.

all i'm saying is that the current dramatically high level of demand for treasuries is unsustainable in the long-term, and so prices will eventually come crashing down.


prices on the 10 year are suggesting not only what you describe, but also that such conditions will remain in effect for nearly all of the next 10 years. i don't think there's anything problematic about 3-month bills being near zero because it's hardly likely that the world rights itself in that time frame. but 10 years? i don't think the price of the 10-year accurately reflects the risks of downside movements 8, 5, 3, or even 2 years out.

[coalition_unwilling]

16. I actually think they are being bought for 'safety' (the flip side of

'risk'). A portion of a bond's value (and its price) derives from the perceived likelihood of issuer default. Since only Armageddon would conceivably cause the U.S. to default, U.S. Treasuries price in a relatively high premium for safety i.e., no risk of default.

[coalition_unwilling]

15. Your approach to investing reminds me of a gambling addict's: "make your

money if you dare, but get out before it bursts." Sounds like conversations I've heard around many a Vegas craps table.

For most investors, keeping a portion of their investments in bonds (as opposed to stocks, commodities or real estate) makes good sense and will continue to make sense. As investors approach retirement age, prudence suggests they shift more of their portfolio to relatively safe bonds and out of more-risky alternatives. If investors are dollar-cost averaging, they will be buying more bonds at higher interest rates and fewer bonds at lower interest rates.

The real long-term risk to U.S. Treasuries, imho, is not that Europe gets 'fixed,' but that inflation heats up, perhaps after a President Romney takes us to war with Iran financed through ever-higher levels of deficit spending (perish the notion).

[unblock]

18. that's an odd statement given that my viewpoint is to be leery of something with limited upside

and huge downside risk.

yes, of course there's merit in having a well-diversified portfolio, and that includes all manner of risks.
there's also merit in shifting you equity holdings gradually to debt instruments as you get older.

in that context, it's hard to argue against having at least a tiny portion of your portfolio invested in just about anything. the gain in terms of lowering portfolio risk is extremely likely to justify whatever the lowered mean expectations are. For instance, 99% equities and 1% treasuries is nearly always better than 100% equities.


but what we're seeing is not that that kind of standard, prudent, modest diversification or life-cycle shifting. what we're seeing is massive amounts of otherwise productive capital being parked in treasuries for lack of clear alternatives with reasonable preceived risk-adjusted gains. demand for treasuries is unsustainably staggering these days.

sooner or later, that capital will flee treasuries for one reason or another and move elsewhere. treasury prices will plummet and prices of a number of other investments (which ones, i wish i knew) will surge.


as for inflation, yet more deficit spending merely adds yet more fuel to a non-existent fire. eventually there will be a spark, and yet more deficit spending means the eventual inflation problem will be that much bigger. but inflation will remain low regardless of deficit spending until there's a spark. historically, a tight labor market has been a major ingredient for meaningful inflation, and that doesn't appear likely any time soon.

i'm not really worried about rmoney getting elected, i think the historical odds are stacked against him (see lichtman's keys to the presidency). but i think we're going to have continued deficit spending regardless, and in fact i wish we'd have more of it (of the right kind, anyway -- demand stimulus, infrastructure investment, and not the usual republican tax cut crap).

i think europe will get fixed, though that might take at least another year. perhaps europe needs to be broken before it becomes politically acceptable to actually fix it. one possibility is a budgetary union of some sort in exchange for germany bailing out greece, spain, etc.

[coalition_unwilling]

22. You know, I think I owe you a giant apology because it appears I

totally misconstrued the overall gist of your remarks which are actually highly cautionary to investors (a good thing for every investor to hear).

Maybe I was projecting my own fear and uncertainty onto your remarks, as it certainly seems like any investment right now is suffering from heightened volatility (equities in 2012 being a perfect case in point). Even trying to reduce risk by diversifying is something of a mixed bag, as there are days when it seems like stocks and bonds are almost 100% correlated At that point, the only safe place to be is with a good sound mattress under which to hide your funds, i.e., an FDIC-insured money market account or demand deposit account.

At any rate, I am really sorry I imputed sentiments to you that more properly belong to the high-stakes casino gamblers in the investment banks. And I agree with everything you have written above.

[unblock]

23. apology?! i thought i was on a political discussion board!

apology accepted. not necessary, but appreciated nonetheless, and showls considerably more character than one finds, certainly online, these days....

[MannyGoldstein]

2. But the invisible bond vigilantes... they must be coming...

Any minute now...

[cthulu2016]

7. The bond money is betting against economic recovery.

And, through an amazing coincidence, politicians around the world do very little to threaten that investment position.

[unblock]

12. well put. the affairs of state are in a very sad state of affairs.

[HiPointDem]

19. +1. they ought to know, they're the ones who precipitated the depression.

[rdking647]

13. IMHO

anyone buying treasuries is an idiot.

10 year bonds are yielding 1.6% with inflation over 2%. a guaranteed loser. better to invest in stocks yielding 6-7% or more (MLP's)

[MadHound]

24. Stocks aren't much better,

Wall Street is a casino these days, and you play at your own risk.