Posts Tagged ‘bond bubble’

RAB CAPITAL: “MASSIVE” DECLINE IN YIELDS COMING

RAB CAPITAL: “MASSIVE” DECLINE IN YIELDS COMING

Courtesy of The Pragmatic Capitalist 

Deflated globe

The bond bubble theorists aren’t going to be happy about this report from RAB Capital.  Their analysts believe there is room for a “massive decline” in government bond yields in the coming years as central bankers attempt to fend off deflation. Bloomberg elaborated on the report:

“Interest rates cannot go up meaningfully for a very long time” in either country, the report said. U.S. Treasury yields have yet to fall far enough relative to the Fed’s target rate for loans between banks to reflect this prospect, he wrote. The same holds true for yields on U.K. gilts by comparison with the Bank of England’s base rate, in his view.

The 20-year Treasury yield ended last week at 3.49 percent after declining 1.2 percentage points from this year’s high, set on April 5. Twenty-year gilts yielded 3.91 percent after falling 0.83 point from a Feb. 19 peak. The gaps between the yields and benchmark rates — 3.24 points and 3.41 points, respectively — were still close to 40-year highs, according to the report.

bloom1 RAB CAPITAL: MASSIVE DECLINE IN YIELDS COMING

“Further purchases of bonds by central banks can only accelerate this inevitable adjustment” in yields, Joshi wrote, adding that the bull market in fixed-income securities “is far from over.”

The Fed may have to buy more debt to head off deflation, according to Joshi, who described this so-called quantitative easing as “the greatest pawn-broking scheme” ever implemented. Fed policy makers decided last month to keep the central bank’s securities holdings at $2.05 trillion by reinvesting proceeds from maturing mortgage-backed bonds into Treasuries.

It’s an interesting chart and analysis, however, the one thing I would point out is that rates tend to converge (1:1) when the Fed is fighting off an inflation threat. The periods shown on the above chart shows when the Fed raised rates substantially and inverted the yield curve.  In other words, the bond market was less concerned with inflation than the Fed was. Perhaps more importantly, however, the economy was smoking hot when rates converged. While I don’t disagree that rates are likely to remain low for some time, the implication that rates could converge appears a bit misleading. 10 year rates in Japan are sub 1% after 20 year of malaise while the overnight rate remains near zero. Are we headed there? I am not that…
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THE MYTH OF THE GREAT BOND “BUBBLE”

THE MYTH OF THE GREAT BOND “BUBBLE”

Courtesy of The Pragmatic Capitalist 

AMESBURY, ENGLAND - JUNE 21: A bubble floats past as revellers watch as the midsummer sun rises just after dawn over the megalithic monument of Stonehenge on June 21, 2010 on Salisbury Plain, England. Thousands of revellers gathered at the 5,000 year old stone circle to see the sunrise on the Summer Solstice, which is the longest day of the year in the Northern Hemisphere. (Photo by Matt Cardy/Getty Images)

There is increasing chatter of the great “bond bubble” as U.S. Treasury bonds surge ever higher and deflation fears rise.  This is just one more myth that has persisted in recent years (decades really) due to mass misconception of the way the bond market actually operates and this propensity to label everything as a “bubble”.

Before we dive into the real meat of the argument it’s important that we define what a market “bubble” is.  A “bubble” occurs when market forces combine to generate a highly unstable position.  This results in the system entering an extreme disequilibrium and ultimately failure.  The causes of this “bubble” (or extreme disequilibrium) can be many – though primarily psychological any number of exogenous factors can contribute to the instability of the system (government policy for example).  The psychological aspect of a bubble is well explained by analysts at BNP Paribas:

“When interacting agents are playing in a hierarchical network structure very specific emerging patterns arise.  Let us clarify this with an example. After a concert the audience expresses its appreciation with applause. In the beginning, everybody is handclapping according to their own rhythm. The sound is like random noise. There is no imminence of collective behavior. This can be compared to financial markets operating in a steady-state where prices follow a random walk. All of a sudden something curious happens. All randomness disappears; the audience organizes itself in a synchronized regular beat, each pair of hands is clapping in unison. There is no master of ceremony at play. This collective behaviour emanates endogenously. It is a pattern arising from the underlying interactions. This can be compared to a crash. There is a steady build-up of tension in the system (like with an earthquake or a sand pile) and without any exogenous trigger a massive failure of the system occurs. There is no need for big news events for a crash to happen.

Financial markets can be classified as open, non-linear and complex systems. They also exhibit emanating patterns as a result of which the “invisible hand” can be very shaky.  More then 40 years ago Benoit Mandelbrot described the fractal structure of cotton prices and the emanating properties of fat tails and volatility clustering and Hyman Minsky proposed a theory for endogenous speculative bubble formation.


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TIPS Like Sugar

TIPS Like Sugar

Sugar Is A Carbohydrate With A Sweet Taste. White Sugar Sugar. It Contains Calories But Very Little Other Nutr White Sugar In Cubes

Courtesy of Joshua M Brown, The Reformed Broker 

The ‘Treasury Bonds are a Bubble" meme has been going around and building intensity for months now, but we’ve finally seen the definitive article written on the subject in the Wall Street Journal.

Jeremy Siegel and Jeremy Schwartz frame the story in a context that the investor class will truly understand – they compare it to the dot com bubble.  I had front row seats for that show as a young stockbroker ten years ago and, like anyone else that was there, I have injuries so visceral that I can actually sense when rain is coming.

Of particular importance is their comparison of tech stocks then with TIPS now…

We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic.

The rush into bonds has been so strong that last week the yield on 10-year Treasury Inflation-Protected Securities (TIPS) fell below 1%, where it remains today. This means that this bond, like its tech counterparts a decade ago, is currently selling at more than 100 times its projected payout.

The rush into TIPS has felt mind-boggling to me, in spite of the fact that this trade has "continued to work".  With the Professor in agreement, I feel (only slightly) better about my reluctance to participate.

Meanwhile, The Boss has been making the media rounds talking about the bond bubble story all week, on MSNBC and Fast Money last night, on Bloomberg Radio this morning.  This long-simmering story is finally getting some real attention.

Felix Salmon and Vince Fernando have had a highly important back-and-forth on what exactly the  TIPS Spread is pricing in and Eddie Elfenbein picked up on the fact that JNJ was able to price a 10-year bond with a yield under 3% while it’s common stock pays a 3.6% dividend yield.

The disgust for the growth prospects of equities is palpable as money flies out of stocks and piles into bonds of every stripe.  Here’s the WSJ on these inflow/outflow stats:

Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites. The Investment Company Institute reports that from January 2008 through June 2010, outflows from equity funds


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Nassim Taleb Says The Financial System Is Now Riskier Than It Was Before The 2008 Crisis

Nassim Taleb Says The Financial System Is Now Riskier Than It Was Before The 2008 Crisis

Courtesy of Tyler Durden

PERTH, AUSTRALIA - APRIL 15: A Black Swan sits in the water as Nicolas Ivanoff of France competes during the Red Bull Air Race Training day on April 15, 2010 in Perth, Australia. (Photo by Dean Mouhtaropoulos/Getty Images for Red Bull Air Race)

Nassim Taleb is out making waves once again, this time at the Discovery Invest Leadership Summit in Johannesburg today, where he said he was “betting on the collapse of government bonds” and that investors should avoid stocks. To be sure this is not a new position for Nassim, who in February had the same message, when he said that "every single human being" should be short U.S. treasuries. Indeed since then bonds have gone up in a straight line as the bond bubble has grown to record levels, and with the ongoing help of the Fed, is it any wonder. The only question is when will this last bubble also pop.

More from Bloomberg:

“I’m very pessimistic,” he said at the . “By staying in cash or hedging against inflation, you won’t regret it in two years.”

Treasuries have rallied amid speculation the global economic recovery is faltering, driving yields on two-year notes to a record low of 0.4892 percent today. The Federal Reserve yesterday reversed plans to exit from monetary stimulus and decided to keep its bond holdings level to support an economic recovery it described as weaker than anticipated. The Standard & Poor’s 500 Index retreated 16 percent between April 23 and July 2, the biggest slump during the bull market.

The financial system is riskier that it was than before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, Taleb said.

Will the Black Swan author be correct? Perhaps (and given enough time, certainly), although as virtually everyone is expecting a dire outcome in both the public and private sector, courtesy of the untenable balance sheet, the surprise will most certainly have to come from some other place. And with even The Atlantic now posting cover stories on the Iran war spark, it is increasingly less likely that geopolitics will be the issue. Is every possible dire outcome priced in? If so, Taleb should focus his formidable intellect on answering just what the market is missing.


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What Bond Bubble?

What Bond Bubble?

Girl Playing with Bubbles

Courtesy of Rom Badilla of Bondsquawk.com

Interest rates have rallied tremendously in recent months as concerns of an economic slowdown and the potential for a double dip weigh on the minds of both Wall Street and Main Street.  Since early April, which marks the recent high in rates, the long-end of the curve has rallied significantly.  The yield on the 10-Year U.S. Treasury has declined more than 100 basis points to 2.97 percent during that time frame.

That type of change usually takes many months, if not years, to accomplish.  The average implied volatility of both interest rate swaptions and options on Treasuries over the last 10 years is around 100-120 basis points on an annualized basis.  Hence, the move to where we are now is quite significant.

Admittedly, part of the decline is attributed to a flight to quality due to fears of contagion from Greece and the European debt crisis.  However, the last leg of the drop in yields was due to signs of a slowing economy and declining price pressures.  If it were a continuation of the flight-to-quality trade, we would have seen the dollar appreciate as was the case earlier when the Euro approached parity as sovereign risk escalated.  Lately with the recent string of weak domestic economic data, the dollar has declined 1.7 percent from June 21 while the 10-Year rallied 26 basis points and pushed below 3 percent.

If there’s any argument that there is a bond bubble, keep in mind that there needs to be an imbalance, i.e. a shift in outlook toward lower rates.  Basically, the majority of the world needs to be on one side of the boat, where tipping over is a possibility and the imbalance is ultimately rectified.  Right now, we are far from that.

According to Bloomberg’s economic and interest rate survey, market participants still expect higher rates to materialize with the Federal Reserve raising rates in early 2011.  In additions, forecasters expect the 10-Year to increase 40 basis points to 3.37 percent by the end of the Third Quarter.

 

Bloomberg Economic Forecasts

Rate hawks and bond vigilantes are still advocating for higher rates as the U.S. grapples with both perceived higher inflationary expectations fueled by future economic growth and higher fiscal deficits.  To be honest, after packing on the calories by downing countless hotdogs and…
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Will the Supremes Save Democracy From Minority Rule?

 

Will the Supremes Save Democracy From Minority Rule?

Courtesy of  and

This post first appeared on BillMoyers.com.

The Supreme Court now has the power to put a decisive end to extreme gerrymandering — if Justice Anthony Kennedy and the four liberal-leaning justices can craft a clear and manageable standard to identify when partisan mapmakers go too far.

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One River CIO "We're Willing Participants In Our Own Demise"

Courtesy of ZeroHedge. View original post here.

With the world's focus falling on Beijing this week, where president Xi Jinping give a glowing account of China's future during the 19th Party Congress, boasting that “the banner of scientific socialism with Chinese characteristics is now flying high and proud for all to see," not all are impressed by China's vision of the world in which China sees itself as increasingly taking over from the US as the world's superpower. And it's not just stories about China's neverending behind the scenes bailouts of anything that may telegraph a hard landing for...



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Moody's Says Hartford Could Default As Early As November

By Gary St. Fleur. Originally published at ValueWalk.

The historic headquarters of insurance giants like Aetna, and Cigna, Hartford Connecticut now faces a potential financial catastrophe.

On Thursday, October 19, it was announce that the likelihood of Hartford Connecticut, to meet its obligations for the month grows continually bleak. Moody’s has produced a press release stating their position that Hartford Connecticut is likely to default by month’s end.

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An Evening in Wonderland

 

An Evening in Wonderland

Courtesy of 

 

 

You walk halfway across Rivington Street and in the middle of the block there’s an alley leading north, and then, inexplicably, it curves northwest. It’s remarkable in that on the Isle of Manhattan there aren’t any alleys. And this one is whimsical. Lights are strung overhead and artwork decorates the sides of the buildings as you make your way through. And then, at the end of Freemans Alley, you come to a tucked away restaurant in the back corner. It’s called Freemans (what else?).

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Gold Cycle Update

Courtesy of Read the Ticker.

Why has gold not fallen below $1000 (well so far), what is the golden canary telling us?

Previous Posts:
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In short, the old heads out there know there is a ying for a yang! Currently the SP500 screaming higher, massive debt, low very !VIX. But as well all know this wont last forever, and the flip side could be very scary. Hence the hedge into metals, and building of the 4.5 year gold base, and as a ...

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There Could Be 109% Upside In uniQure As Company Advances Gene Therapy Into Clinical Trials

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Puts things in perspective:

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Circadian rhythm Nobel: what they discovered and why it matters

Reminder: Pharmboy and Ilene are available to chat with Members, comments are found below each post.

 

Circadian rhythm Nobel: what they discovered and why it matters

Courtesy of Sally Ferguson, CQUniversity Australia

Today, the “beautiful mechanism” of the body clock, and the group of cells in our brain where it all happens, have shot to prominence. The 2017 Nobel Prize in Physiology or Medicine has been awarded to Jeffrey C. Hall, Michael Rosbash and Michael W. Young for their work on describing the molecular cogs and wheels inside our biological clock.

In the 18th century an astronomer by the name of Jean Jacques d'Ortuous de Ma...



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Day of Last Dances

News today has been relentlessly terrible. A horrific mass murder happened last night in Las Vegas. (Our politician's abject failure to address gun control is beyond sickening.) And today, reports that Tom Petty died of a heart attack, followed by reports that Tom Petty is not dead, and now reports confirming that Tom Petty has passed away. 

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Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.

 

This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...



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NewsWare: Watch Today's Webinar!

 

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Bill Olsen from NewsWare will be giving us a fun and lively demonstration of the advantages that real-time news provides. NewsWare is a market intelligence tool for news. In today's data driven markets, it is truly beneficial to have a tool that delivers access to the professional sources where you can obtain the facts in real time.

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Brazil; Waterfall in prices starting? Impact U.S.?

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CLICK ON CHART TO ENLARGE

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Mid-Day Update

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