I'm not a bond trader -so let me disclaim myself first off. Also, I've read numerous articles on yield curves and the meaning of bond prices - but I want to discuss this on a macro level with more informed members of the group.
Here's my personal view and attitude:
1) for me to invest in long bonds, I'd require a high dividend yield (7 or 8% range), mainly because I see inflation (high energy prices long term expected) and a weakening dollar (from poor US fiscal policy, etc) as a continuing long term force.
But -- the market doesn't seem to coincide with my personal view:
1) Bond yields are going down, because the market believes inflation and a weakening US dollar as a long term force are not an issue.
2) Intuitively, I would conclude if the bond market believes the fed will be done raising overnight lending rates, then yields should adjust downward. So do lukewarm earnings outlooks and a viewed price ceiling (ie oil resistance at 75) to the commodities runup all comprise a view that even another rise in 25 basis points for the fed rate is unlikely?
This differs from what every analyst you see in the media things. Yet bond prices go up today? I would presume if the market anticipated a .25 bp increase in short term rates, treasuries would at least not go up in price in the interim.
I'm not sure what to make of any of it.
So it doesn't make sense to me - despite all of my own bearishness, does the market tell all: they believe long term the US dollar will continue to be at least as strong as it is now, and that inflation will slow down to an acceptable point ?
Or do long term views not enter into markets, even with products that go 10 or 30 years out ?
Please cite faults in this (seemingly circular) logic contributing to my long term view:
1) National debt service issues will not be a problem if inflation or hyperinflation occurs, as increased government tax revenues will cover cost of debt. Thus, high inflation (through high interest rates and/or putting more money into circulation) is required to get us out of a potential bind with our national debt.
2) If bond markets are bullish, then inflation is not viewed as a long term pressure (since bond yields NEED to outperform inflation pressure).
3) Typically stock markets suffer in a bullish bond market?? [since bond appreciation will outperform stock from lowering rates]
4) If future inflation is anticipated low, bonds do not need as high yields to offset risk of holding dollars to foreign investors. So dollar strengthens, and our exports continue to go down, and stock markets suffer. Additionally high commodity costs if remaining (but not growing) add downward pressure to stock markets and economy.
5) Tax revenues go down to US government from faltering US companies, and government needs to print more money and issue more bonds to prevent from defaulting on debt. INFLATION and US dollar continues to devalue.
6) Bond rally stops with inflation realized, and yields go up to catch up to rising inflation. Fed comparably raises drop lending rates to stimulate corporate growth. Dollar continues to weaken, but companies do OK.
7) Devaluing US dollar and poor economic health on the bright side lower our trade deficits with asia, since we can't afford to buy anything with worthless dollars. On the other hand, our exports thrive since strong currency countries can afford to import our products, and equity markets and economy recover.
So I predict a great stock market boom in tandem with a dollar collapse.
[you see why none of this makes sense to me]
Here's my personal view and attitude:
1) for me to invest in long bonds, I'd require a high dividend yield (7 or 8% range), mainly because I see inflation (high energy prices long term expected) and a weakening dollar (from poor US fiscal policy, etc) as a continuing long term force.
But -- the market doesn't seem to coincide with my personal view:
1) Bond yields are going down, because the market believes inflation and a weakening US dollar as a long term force are not an issue.
2) Intuitively, I would conclude if the bond market believes the fed will be done raising overnight lending rates, then yields should adjust downward. So do lukewarm earnings outlooks and a viewed price ceiling (ie oil resistance at 75) to the commodities runup all comprise a view that even another rise in 25 basis points for the fed rate is unlikely?
This differs from what every analyst you see in the media things. Yet bond prices go up today? I would presume if the market anticipated a .25 bp increase in short term rates, treasuries would at least not go up in price in the interim.
I'm not sure what to make of any of it.
So it doesn't make sense to me - despite all of my own bearishness, does the market tell all: they believe long term the US dollar will continue to be at least as strong as it is now, and that inflation will slow down to an acceptable point ?
Or do long term views not enter into markets, even with products that go 10 or 30 years out ?
Please cite faults in this (seemingly circular) logic contributing to my long term view:
1) National debt service issues will not be a problem if inflation or hyperinflation occurs, as increased government tax revenues will cover cost of debt. Thus, high inflation (through high interest rates and/or putting more money into circulation) is required to get us out of a potential bind with our national debt.
2) If bond markets are bullish, then inflation is not viewed as a long term pressure (since bond yields NEED to outperform inflation pressure).
3) Typically stock markets suffer in a bullish bond market?? [since bond appreciation will outperform stock from lowering rates]
4) If future inflation is anticipated low, bonds do not need as high yields to offset risk of holding dollars to foreign investors. So dollar strengthens, and our exports continue to go down, and stock markets suffer. Additionally high commodity costs if remaining (but not growing) add downward pressure to stock markets and economy.
5) Tax revenues go down to US government from faltering US companies, and government needs to print more money and issue more bonds to prevent from defaulting on debt. INFLATION and US dollar continues to devalue.
6) Bond rally stops with inflation realized, and yields go up to catch up to rising inflation. Fed comparably raises drop lending rates to stimulate corporate growth. Dollar continues to weaken, but companies do OK.
7) Devaluing US dollar and poor economic health on the bright side lower our trade deficits with asia, since we can't afford to buy anything with worthless dollars. On the other hand, our exports thrive since strong currency countries can afford to import our products, and equity markets and economy recover.
So I predict a great stock market boom in tandem with a dollar collapse.
[you see why none of this makes sense to me]