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Shorting US bonds
- Thread starter mtzianos
- Start date
I don't buy the "deflation" scenario. The system was flooded with paper money during the last 3 years (world money growth +37.1% i.e. if your capital has grown less, you've actually lost)
I don't know how good / reliable the long bonds are today as a predictor of future inflation. Let's hear some views on this.
My question is: Why has US discontinued the 30-yr bonds since 2001? I would think that any debt issuer would look forward to locking 30yr yields at these historic lows. I think if US attempted to issue new 30yr bonds, the market would require MUCH higher yields and this was a risk US didn't want to take during the reflation / over-liquification years.
We have also seen that FCBs (at least Bank of Japan, for which there is data) are buying strictly short term debt.
If so, would it be correct to assume that the long-term yields (of which there is a relatively small amount of outstanding issuance) are set by the carry trade ? (bond dealers, hedge funds, US consumers -- everyone).
I don't know how good / reliable the long bonds are today as a predictor of future inflation. Let's hear some views on this.
My question is: Why has US discontinued the 30-yr bonds since 2001? I would think that any debt issuer would look forward to locking 30yr yields at these historic lows. I think if US attempted to issue new 30yr bonds, the market would require MUCH higher yields and this was a risk US didn't want to take during the reflation / over-liquification years.
We have also seen that FCBs (at least Bank of Japan, for which there is data) are buying strictly short term debt.
If so, would it be correct to assume that the long-term yields (of which there is a relatively small amount of outstanding issuance) are set by the carry trade ? (bond dealers, hedge funds, US consumers -- everyone).
Quote from BlueHorseshoe:
"Most central bankers choose price stability as the main target of monetary policy, whether it be wholesale prices, the consumers' price index, or the gross domestic product deflator is not a critical issue. If, however, the explosion of a bubble in stocks and/or real estate can affect bank solvency in general, there is a basis for saying that central bankers should keep an eye on asset prices too. In one view, asset prices should be incorporated into the general price level because, in a world of efficient markets, they hold a forecast of what future prices and consumption will be. But this assumes that asset prices are determined within a narrow range by fundamentals, as they often are to be sure, and will not be affected by herd behavior, leading to a bubble that will ultimately burst."
To paraphrase Greenspan back in November (?) 'Anyone who isn't prepared for much higher interest rates is determined to lose a lot of money.'
(Maybe someone can help me w/ that quote.)
In short: Short Bonds.
This line: "asset prices should be incorporated into the general price level " has to be the dumbest thing I have ever heard regarding inflation. Inflation indexes should take into account anything that is consumable by the average person. Stocks, bonds, etc. are not consumable, they are investments.
I guess when your out of bonds hoping for higher rates or are dumb enough to short the damn things the past few years its time to make things up to try and justify a position.
As for Greenspan and his warning, he's trying to talk rates up. He knows inflation is not coming back for awhile and if China fks it up raising rates, then everything goes to hell on the downside. A major terrorist attack or any screwup and we go to zero interest.
Quote from yenzen:
yeah man, good post. bond market act like deflation big enemy while masses catch onto inflation and think that the big problem.
Mr. Zen
Right, the masses are looking at the ROC of money supply and commodity inflation.
The reality is the overwhelming majority of inflationary pressure is on account of wage inflation-- of which there is little, none and, in some sectors, disinflation.
No wage growth / job creation-- no inflation. In fact, increasing the possibilities of a deflationary recession.
A flat yield curve around 4% is the death blow for a debtor nation.
That means more dollar depreciation, more fiat sloshing around the system.. basically all leading to increasing cost of goods, stagnant wages, zero job creation..
Which leads to class warfare.. which causes politicians to wage wars to distract the masses.. create "jobs" (keep the unemployed off the streets and on the firing line).
Mama told me there'd be days like this...
About the asset bubbles and possible Fed actions:
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/EW/2005/FF_Jan_05.htm
http://www.morganstanley.com/GEFdata/digests/20050107-fri.html
And a kind request: please try to keep this journal clean of non-productive comments. I welcome remarks which may point to alternative ways of interpreting facts. Thx.
http://www.pimco.com/LeftNav/Late+Breaking+Commentary/EW/2005/FF_Jan_05.htm
http://www.morganstanley.com/GEFdata/digests/20050107-fri.html
And a kind request: please try to keep this journal clean of non-productive comments. I welcome remarks which may point to alternative ways of interpreting facts. Thx.
Quote from mtzianos:
Why has US discontinued the 30-yr bonds since 2001?
They were discontinued in 2001, but the decision was made several years before. The reason was simple: the Clinton administration, in conjunction with the Congress of the time, had actually managed to make great strides in bringing down the deficits and so they didn't need to sell as many bonds. I wouldn't be surprised to see the 30yr make a comeback given the current easy-spending policies. You're right, it would look bad, as it would highlight the problems with current policy, but at some point there just isn't going to be a choice.
Quote from Covertibility:
I guess when your out of bonds hoping for higher rates or are dumb enough to short the damn things the past few years its time to make things up to try and justify a position.
As for Greenspan and his warning, he's trying to talk rates up. He knows inflation is not coming back for awhile and if China fks it up raising rates, then everything goes to hell on the downside. A major terrorist attack or any screwup and we go to zero interest.
A couple of comments. People here tend to assume if one is negative on Bonds that we simply sell bonds and hope for the best. That is plainly not the best way to play a potential turning point in interest rates and I certainly don't do it that way.
For me, this play has begun w/ bear call spreads and a sprinkling of long puts. As profits accumulate and momentum builds I'll get more aggressive.
But recall that interest rates can trend for decades and we are only somewhere near the beginning.
Currently I get quite excited / happy when interest rates drop 'cause that allows me to continue spreading at what I consider attractive levels and allows me to build ammunition for when that day comes.
Also, would agree that we are at risk of recession and that could drop rates back to zero. Yes, rates could drop back to zero. But my bet at that point would be that that is the bottom for interest rates as the liquidity rush would be tremendous and commodiities would shoot through the roof.
In short I find it quite funny how Setharb and a few others can take some sort of delight in thinking we are getting hurt from continued low interest rates. Couldn't be further from the truth.
Quote from LaSalle:
Right, the masses are looking at the ROC of money supply and commodity inflation.
The reality is the overwhelming majority of inflationary pressure is on account of wage inflation-- of which there is little, none and, in some sectors, disinflation.
No wage growth / job creation-- no inflation. In fact, increasing the possibilities of a deflationary recession.
This is a reasonable point.
One error you and I believe others are making is that you are only looking at the US. This is a global economy, and guess where wage rates are rising, perhaps the fastest in the world?
That's right - CHINA! Wages for local skilled workers and management level have been growing at double digit rates for the past couple years because they are in such high demand. The reason why there has not been a tremendous impact on prices is that the wages were starting from an EXTREMELY LOW BASE.
From the American perspective wages are under pressure, but from Chinese', wages are on the rise. Guess who's going to win that battle?
Again, it just highlights what a long-term trend this is going to be.
Quote from BlueHorseshoe:
From the American perspective wages are under pressure, but from Chinese', wages are on the rise. Guess who's going to win that battle?
Again, it just highlights what a long-term trend this is going to be.
This is what Morgan Stanley's Steven Roach has termed the "global labor arbitrage" trend.
It is really an interesting topic of discussion / speculation. Intuitively one might think Chinese and American wages ultimately meet somewhere in the middle; however trends and prospective outcomes in global economics is rarely intuitive and often quite unintuitive.
The long term health of the global economy is hinged on economies, other than the US, developing an internal demand dynamic. That isâsomeone other than Americans need to develop a taste for American-style consumerism. As it is, most participants in foreign economies are huge savers; sacrificing current consumption for investment in the future.
Given the current and growing global imbalancesâthis trend canât last forever. Either the Asian economies-like their American counterparts- start haphazardly consuming or the entire global economy tips into a prolonged recession (depression?) as an already thinly stretched American consumer snaps and retrenches.
Quote from LaSalle:
That isâsomeone other than Americans need to develop a taste for American-style consumerism.
The never-ending US demand is no longer being fueled by internal economic development as it was immediately after WW2, when the capability differential between the US and every other continent was increasing. It is now being fueled by increasing leverage and hammering down costs of goods by moving to low-cost producers. It is prima facie obvious that low-cost producers cannot, by definition, be consuming on the scale of their own customers, and since the two major producers going forward house about a 1/3 of the world's population, the theory is fundamentally flawed.
The competitive advantage the US held over the rest of the planet for nearly 20 years wasn't a superior economic model, it was having the "foresight" to succesfully avoid having its industrial base turned into the smouldering ruin every other industrial power was left with after WWII.
I'm not suggesting the global economy is in a perpetual tailspin, only that the long term trend, barrring drastic global events, will continue to be relative stagnation in the G8 until the rest of the planet catches up. The Good Times will still happen, they'll just happen elsewhere a whole lot more than they happen here.