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Bund conundrum?
- Thread starter mtzianos
- Start date
Pimco stuff will get you thinkin' - go to their website.
Fundymentally, I see multiple, counter-vailing forces for interest rate trends, and haven't reached a conclusion which will next win out.
Speaking on 10-yr prices (not rates) obviously secular hikes in commodity prices are bearish. I also believe labor costs in China/India, or at least the incremental benefit of shifting manufacturing over there, will diminish - note the negative US productivity surprise last week.
On the bullish side, prices have been on a 20-year bull tear, and picking a bottom is quite dangerous. Moreover, I'm not sure that the impetus behind that bull run has expended itself.
**I suspect that long-term generational patterns - i.e. spending patterns as US baby boom came of age - drove rates lower. (Yes, you read that right. Greenspan was irrelevant - just rode the wave.) A good source on the generational impact on interest rates is Harry Dent's "The Great Bull Ahead." Yes the 1993 book is dated but he leads with a great synopsis of the baby boom's impact on markets, rates, housing etc ... (There are other authors who have also written on this topic, but I haven't read.)
Some references:
1. Make sure you know what rates do on a seasonal basis, recognizing that the charts only reflect the most recent bull market. If I see prices start grossly violating these historical patterns, I will likely soon come to believe that rates are set to go (and stay) much higher.
http://www.spectrumcommodities.com/education/commodity/charts/ty.html
Another seminal book which I've bought but have only skimmed is Sidney Homer's "A History of Interest Rates"
I would also recommend reviewing/studying recent (20-40 year) interest rate history in Japan and its relationship to their stock and real estate bubbles. One good book on this is Christopher Wood's "The Bubble Economy." I'd be interested in hearing of other good references on Japan rates.)
There are other interesting angles from which to look at this ... but somehow I suspect this is already more winded than you want.
Have fun.
Fundymentally, I see multiple, counter-vailing forces for interest rate trends, and haven't reached a conclusion which will next win out.
Speaking on 10-yr prices (not rates) obviously secular hikes in commodity prices are bearish. I also believe labor costs in China/India, or at least the incremental benefit of shifting manufacturing over there, will diminish - note the negative US productivity surprise last week.
On the bullish side, prices have been on a 20-year bull tear, and picking a bottom is quite dangerous. Moreover, I'm not sure that the impetus behind that bull run has expended itself.
**I suspect that long-term generational patterns - i.e. spending patterns as US baby boom came of age - drove rates lower. (Yes, you read that right. Greenspan was irrelevant - just rode the wave.) A good source on the generational impact on interest rates is Harry Dent's "The Great Bull Ahead." Yes the 1993 book is dated but he leads with a great synopsis of the baby boom's impact on markets, rates, housing etc ... (There are other authors who have also written on this topic, but I haven't read.)
Some references:
1. Make sure you know what rates do on a seasonal basis, recognizing that the charts only reflect the most recent bull market. If I see prices start grossly violating these historical patterns, I will likely soon come to believe that rates are set to go (and stay) much higher.
http://www.spectrumcommodities.com/education/commodity/charts/ty.html
Another seminal book which I've bought but have only skimmed is Sidney Homer's "A History of Interest Rates"
I would also recommend reviewing/studying recent (20-40 year) interest rate history in Japan and its relationship to their stock and real estate bubbles. One good book on this is Christopher Wood's "The Bubble Economy." I'd be interested in hearing of other good references on Japan rates.)
There are other interesting angles from which to look at this ... but somehow I suspect this is already more winded than you want.
Have fun.
BHS, thx for PIMCO suggestion, I already visit them regularly. In Sep05 articles they're again looking for wider spreads and selloff in riskier assets. They think that Fed is targeting the bond bubble, in order to keep the housing bubble from growing even larger.
The conundrum still exists. Today, EU yields are at ALL TIME LOWS, 10yr Bund yields 3.0x% (vs 3.9-4.1x% of US 10yr T-Notes)
Btw, here's what Greenspan said (9 months ago in his testimony before US Congress)
The conundrum still exists. Today, EU yields are at ALL TIME LOWS, 10yr Bund yields 3.0x% (vs 3.9-4.1x% of US 10yr T-Notes)
Btw, here's what Greenspan said (9 months ago in his testimony before US Congress)
"In this environment, long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields. The simple mathematics of the yield curve governs the relationship between short- and long-term interest rates. Ten-year yields, for example, can be thought of as an average of ten consecutive one-year forward rates. A rise in the first-year forward rate, which correlates closely with the federal funds rate, would increase the yield on ten-year U.S. Treasury notes even if the more-distant forward rates remain unchanged. Historically, though, even these distant forward rates have tended to rise in association with monetary policy tightening."
"But we should be careful in endeavoring to account for the decline in long-term interest rates by adverting to technical factors in the United States alone because yields and risk spreads have narrowed globally. The German ten-year Bund rate, for example, has declined from 4-1/4 percent last June to current levels of 3-1/2 percent. And spreads of yields on bonds issued by emerging-market nations over U.S. Treasury yields have declined to very low levels.
There is little doubt that, with the breakup of the Soviet Union and the integration of China and India into the global trading market, more of the world's productive capacity is being tapped to satisfy global demands for goods and services. Concurrently, greater integration of financial markets has meant that a larger share of the world's pool of savings is being deployed in cross-border financing of investment. The favorable inflation performance across a broad range of countries resulting from enlarged global goods, services and financial capacity has doubtless contributed to expectations of lower inflation in the years ahead and lower inflation risk premiums. But none of this is new and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience."
But really, how is it a conundrum that yields remain on their 20-year trend?
By definition it is a 'conundrum' only because Greenspan professes not to understand why long rates remain as low as they do.
Frankly, I don't as yet see anything out of the ordinary occuring with rates.
In the end Greenspan is a trader, and he is griping that the market isn't doing what he wants it to do ...
My interest is more on discerning where rates are going in short/med/long term. That Greenspin wants to talk about a conundrum is interesting, but not of immediate interest ...
By definition it is a 'conundrum' only because Greenspan professes not to understand why long rates remain as low as they do.
Frankly, I don't as yet see anything out of the ordinary occuring with rates.
In the end Greenspan is a trader, and he is griping that the market isn't doing what he wants it to do ...
My interest is more on discerning where rates are going in short/med/long term. That Greenspin wants to talk about a conundrum is interesting, but not of immediate interest ...
I just reject the proposition that bond yields present a conundrum - or as Greenspan seems to suggest, are not where they ought to be
IMO the market is perfect - a perfect reflection of buy/sell forces that include fundamental, technical, emotional, every and all factors at any given point in time.
That 'span wants to call the market a 'conundrum' is a reflection of his own lack of understanding, or unwillingness to accept where the market is at.
That he doesn't understand or accept, doesn't make the market any less perfect ...
IMO the market is perfect - a perfect reflection of buy/sell forces that include fundamental, technical, emotional, every and all factors at any given point in time.
That 'span wants to call the market a 'conundrum' is a reflection of his own lack of understanding, or unwillingness to accept where the market is at.
That he doesn't understand or accept, doesn't make the market any less perfect ...
Quote from BlueHorseshoe:
IMO the market is perfect - a perfect reflection of buy/sell forces that include fundamental, technical, emotional, every and all factors at any given point in time.
Well, I think I would agree that the market is in a MOMENTARY EQUILIBRIUM (based on those factors you mention) at any given point in time, but is it always "perfect"? "correct"? "efficient"? Not in my opinion. Markets often overshoot both ways.
There are huge imbalances in our world, and (among other factors) 50yr low interest rates allow them to grow even bigger.
E.g., multi-generation-low interest rates have allowed the creation and proliferation of the housing bubble, in total disconnect with people's income. Not just in the US (but in US the effect has been larger).
There's more to this than over/under-shooting of some stock in the stockmarket-casino.
Agreed, the low rates across the world have caused everyone to become starved for yield. Look at the Japenese, they are getting about 200 more basis points by buying our bonds than investing in their own bond market. This only adds fuel to the housing-related consumption fire. Essentially, because the United States cannot save its own money we need to support the rest of the world by consuming the cheap goods they dump upon us through discount retailers like Wal-Mart. Wage growth in the US is stagnant, labor costs are way too high because of unions, so we no longer need to manufacture goods here, with a massive trade imbalance being the result. The stock market returns have come back to reality from the mid 90's, and these are still some of the best returns globally (although the Nikkei has done well as of late). I think it will be interesting to see if Japan ever conquers price deflation and inflation somehow returns, could have some strange affects in our bond market, possibly getting rid of the conundrum. But this may not be seen for another five years down the road (who knows exactly). Not to mention we are going to have new 30yr bond supplies returning early next year, which could change long end rates quite a bit. At the least this should make for interesting trading opportunities the next 10 years or so as the US begins to restructure its own debt portfolio and the Fed remains perplexed by market situations.
Quote from mcurto:
Agreed, the low rates across the world have caused everyone to become starved for yield.
"Starved for yield", Right. Even some paper from Bank of England used this particular term 1yr+ ago.
With nominal interest rates so low, I think that a lot of pension funds will have big trouble to meet their obligations. This is potentially a huge political problem.
I think that, one of the reasons for the "conundrum" is the concentration of wealth in fewer and fewer hands. No wealth redistribution as in previous decades.
E.g. just BigOil has amassed $500bn in profits during the last few years. Will they re-invest it? Not sofar.
So, I guess in similar cases, most of these "savings" will be "parked" in assets (stocks and bonds) sending their prices soaring.
Quote from mtzianos:
I think that, one of the reasons for the "conundrum" is the concentration of wealth in fewer and fewer hands. No wealth redistribution as in previous decades.
True ... I like that.
It is these massive, slow moving, real-world, politically sensitive factors that tend to get ignored or overlooked when considering things like long-term rates.
Thanks ...
Just a quick followup:
US bonds have sold off quite impressively, after the expiration short-squeeze (June scenario all over)
Yet, EU bonds, have barely budged (-0.5%) from multi-decade highs (yield lows) reached last last week.
Sofar for Bund, the "resistance" of 122.60-70 on charts seems to be tough to break.
If anyone is following the bond market(s), I wonder
1/ wouldn't ZN-GB spreaders (long GB, short ZN) be taking some profits, which would have caused GB to sell off a little, in sympathy to US bonds?
2/ If, as I suspect judging from how asset markets in EU behave last 2yr, there are "real money" flows into EU assets (OPEC, Asia etc) then why is Euro/USD still so weak?
US bonds have sold off quite impressively, after the expiration short-squeeze (June scenario all over)
Yet, EU bonds, have barely budged (-0.5%) from multi-decade highs (yield lows) reached last last week.
Sofar for Bund, the "resistance" of 122.60-70 on charts seems to be tough to break.
If anyone is following the bond market(s), I wonder
1/ wouldn't ZN-GB spreaders (long GB, short ZN) be taking some profits, which would have caused GB to sell off a little, in sympathy to US bonds?
2/ If, as I suspect judging from how asset markets in EU behave last 2yr, there are "real money" flows into EU assets (OPEC, Asia etc) then why is Euro/USD still so weak?