Bond rally nearing an end?
- Thread starter gharghur2
- Start date
Would you mind elaborating...
What's your take?
What's your take?
Quote from gharghur2:
Hey Doc,
The best asset play right now is without question Shanghai's SEC. The only problem is it's closed to foreigners
So I have to play Hong Kong companies that do their biz in China.
China's bull market is just getting going (less than a year old), while everyone else's is three-plus years old. As are the commdoity bull markets as well.
Now if they open their market so that the SEC ETF that trades in Shanghai was made available worldwide, I'd be a happy man.
How about China Fund Inc. (NYSE:CHN)? Maybe we can take it as a proxy to get a bit of China bull?
http://finance.yahoo.com/q/bc?s=CHN&t=my
Bonds are what are keeping me from sleeping at night.
Why does everyone believe bonds will fall?
Because the dollar will fall?
I think everyone underestimate the dollar depreciation that already have been taking place. The marked have already priced in record US debt and trade deficit.
http://finance.yahoo.com/currency/convert?from=USD&to=EUR&amt=1&t=5y
Roughly 43% against the Euro since 2001. Thatâs in a period where US growth have been superior to Euro growth.
Historically US inflation have been 3.1%. Yield on the 30y bond have been 5.3%, if I remember correctly. Thatâs only 2.2% real return on average.
Now things have changed. The new monetary regime with inflation targeting should keep inflation at around 2%. 5.2% yield on the 30y gives 3.2% real return.
Thatâs 1% more in real yield than the historical norm in a period where real yield should be less than the historical norm for at least three reasons.
1 - Demographics â the ageing population should keep the demand for bonds high.
2 - Savers are still scratching their scars from the IT-bubble, so stocks should have less relative appeal than historically.
3 â Inflation targeting. This keeps inflation expectation low, witch reduces the likelihood of wage inflation. And reassure bond holders that the fed fights for their interest.
US consumers cannot have much fuel left. Oil up, gas up, short rates up, mortgage rates up. Less and less spendable income, and more and more debt. The point in time when they cannot consume as much as they do now by increasing the debt level is near. The wealt effect of rising real estate prices is whats kept consumers consume for so long. This wealth effect will disappear. I see low inflation or even deflation down the road!. In my mind itâs the only soulution. The marked will not be kind enough to just let consumers inflate away all their debt. They must pay for the party.
Business have all the cash. Consumers increasingly less. Who is going to fuel the economy? Business except commodity wonât invest much as the price of capital is getting higher and consumers more and more indebted. A recession is needed.
EVERYONE thinks the dollar will decline.
EVERYONE is concerned about inflation.
EVERYONE bids up any asset class except bonds.
Consumer confidence level is higher than in a long time.
I think its time to start being a real contrarian. Iâm buying long term bonds and corporate bonds every time the yield spikes up.
These days the usual contrarians is no longer contrarians. People listen when they predict higher gold, higher oil, and declining dollar.
Why does everyone believe bonds will fall?
Because the dollar will fall?
I think everyone underestimate the dollar depreciation that already have been taking place. The marked have already priced in record US debt and trade deficit.
http://finance.yahoo.com/currency/convert?from=USD&to=EUR&amt=1&t=5y
Roughly 43% against the Euro since 2001. Thatâs in a period where US growth have been superior to Euro growth.
Historically US inflation have been 3.1%. Yield on the 30y bond have been 5.3%, if I remember correctly. Thatâs only 2.2% real return on average.
Now things have changed. The new monetary regime with inflation targeting should keep inflation at around 2%. 5.2% yield on the 30y gives 3.2% real return.
Thatâs 1% more in real yield than the historical norm in a period where real yield should be less than the historical norm for at least three reasons.
1 - Demographics â the ageing population should keep the demand for bonds high.
2 - Savers are still scratching their scars from the IT-bubble, so stocks should have less relative appeal than historically.
3 â Inflation targeting. This keeps inflation expectation low, witch reduces the likelihood of wage inflation. And reassure bond holders that the fed fights for their interest.
US consumers cannot have much fuel left. Oil up, gas up, short rates up, mortgage rates up. Less and less spendable income, and more and more debt. The point in time when they cannot consume as much as they do now by increasing the debt level is near. The wealt effect of rising real estate prices is whats kept consumers consume for so long. This wealth effect will disappear. I see low inflation or even deflation down the road!. In my mind itâs the only soulution. The marked will not be kind enough to just let consumers inflate away all their debt. They must pay for the party.
Business have all the cash. Consumers increasingly less. Who is going to fuel the economy? Business except commodity wonât invest much as the price of capital is getting higher and consumers more and more indebted. A recession is needed.
EVERYONE thinks the dollar will decline.
EVERYONE is concerned about inflation.
EVERYONE bids up any asset class except bonds.
Consumer confidence level is higher than in a long time.
I think its time to start being a real contrarian. Iâm buying long term bonds and corporate bonds every time the yield spikes up.
These days the usual contrarians is no longer contrarians. People listen when they predict higher gold, higher oil, and declining dollar.
I think the threat of inflation is very prevelant, whether or not it materializes...
My comments are simply that there are always those out there, usually the Administration, who find ways to explain how "this time it's different, there's no wage inflation because of productivity and China".... It's the same camp who back in 2000 said we were in for a soft landing... or who are now saying yield curve inversion doesn't signal recession ahead (they may be right this time, dunno)
My take is that history repeats itself, although I wouldn't characterize myself as a cycles-man... But my ears perk up anytime somebody of authority (Snow comes to mind) and says we will not make the same mistakes as last time...
I think it will be several more months before any talk of deflation starts hitting the publications... I remember deflation talk not hitting when the bubble crashed, but maybe starting 2001-2002... i think you're right in that if the economy slows dramatically and rates need to be softened, bonds will follow... It's nice to see somebody mentioning inflation targeting, since I generally think it's a good idea for bringing transparency to the table...
I was in your camp up until about two months ago, when the commodity markets started going nuts. Inherently inflationary. I think the deflationary influences have been whipped for now - the demographic influences are a long-term drag, not a short term influence. Higher bond yields in the 5-10 year term would go a great way to provide satisfactory yields for the bond buyers under the deflationary scenario, would they not?
Its hard being a deflationist when gold hits $650. Once it drops back to $300, and there is no more talk of protectionistm against China, and strong and severe anti immigration laws are taken, I may re-join your camp, but its too hard to be there for me right now.
If I start buying long bonds at yields upards of 6%, without major deflationary signs, I will not buy zeroes at that level. At 7-8% I may start buying zeroes, but only to hold to maturity, as I could see myself taking a paper loss on that for a few years initially.