Thursday, March 10, 2011

Treasuries (TLT) Benefited From the Selloff

I think it's important to note that Treasuries rallied during today's selloff; TLT up 1.7% and 30-year yield down 10 basis points.

That means that Treasuries still benefit from the "flight to safety" trade. As long as that is true, the Treasury will always be able to sell as much debt as it wants, simply by making equities and other risky assets less attractive.


CP said...

Also important: silver did not benefit from the selloff.

Suggesting silver is a risky asset and not a flight to safety trade.

C. Fischer said...

Are you forming conclusions based on 1 day's worth of trading action? Really?

Treasuries will benefit from a flight to safety right up until when they don't. Like when 100 Billion a month in artifical demands dries up.

CP said...

You guys have this backwards.

QE2 has driven up yields because it has made everyone paranoid about "hyperinflation".

I agree that someday the Ts will no longer benefit from a flight to safety, but there has to be a safer asset first. And right now there isn't one.

[Except nickels.]

whydibuy said...

People are paranoid about inflation?

So you are saying money printing is a free lunch for the gov with no bad consequences.
Well then lets print up enough money to pay off the national debt and all future budget deficits. Like you say, its a free lunch to the U.S.

Zimbabwe should be the best economy in the world then since, as you say, printing has no bad inflationary consequences.

I don't think there are any such thing as a free lunch.

Joe Nelson said...


What do you make of guys like Bill Gross leaving treasuries and agency debt altogether?

CP said...

First of all, if rates go up the housing market will utterly collapse.

As you know I am bearish on a lot of housing-connected sectors.

Second, it looks like BG completely missed the 2008 Treasuries rally.

I am not too impressed with his market timing on Ts - should I be?

C. Fischer said...


While I think inflation expectations are part of the reason QE2 failed its stated goal, I don't think that's the whole story. I think supply of treasuries is simply outstripping demand.

China is not buying at the rate they once did, same with Japan. I don't know how many retail investors get excited over current treasury yields and most would do better in CD's. A think lot of the reason rates are rising is because people bought treasuries in advance to front run the fed, and are now selling. I'm really worried about what happens when we pull that $100 billion of liquity out of the market.. the $5 billion per trading day is a lot.

Treasuries will benefit from a flight to safety, right up until when they don't. Personally, I prefer natural resources..

CP said...

It depends on the natural resource. I think the best assets are the dollar, natural gas, and Treasuries.

I would not buy a long bond if I couldn't sell it before maturity.

T yields started rising right when QE2 started leaking out.

The reason that most people articulate for being bearish on treasuries is... QE2!!

Why do people think that yields will keep rising when they stop QE2?

C. Fischer said...


Yields did not start rising when QE2 was hinted at and then announced. They started rising after it started. But by then, everyone trying to front run the Fed had driven yields down to microscoping level. I think the 5 year bottomed on November 4th at1.04%. Who the hell would lock up their money for 5 years at 1%? So I think part of this was that the yields had no where to go but up.

Why do I think yields are going to rise when QE2 ends? Because the Fed is currently purchasing 70% of the new issuances of Treasuries right now (100 billion a month, plus reinvesting maturing notes.) Who do you think is going to make up that slack when they stop? Foreign governments? Individual investors? Somehow I don't see the Federal Government reigning in spending anytime soon. When supply outstripes demand, prices drop (and yields rise.) Right?

CP said...

Are you guys missing my point because you think I am talking about 5 year notes?

I am talking about the long bond!

TLT was rising right up until the day of the Jackson hole speech:

That was the bottom for yields since 2008.

People will stop buying overpriced silver and junk stocks when the perceived Fed put is gone. The market will tank and they will buy Treasuries.

C. Fischer said...

I was using the 5 year at 1.04% as an example of a ridiculously low yield driven.

The question is both if, and how much, the market declines. Yes, if the market bombs November 08/March 09 style, the long bond will do well. But it wouldn't surprise me to see the S&P finish the year around 1200 but the long bond to be up to 5%.

I don't hate the trade, because I think inflation will remain muted. But the simple supply/demand fundamentals I don't like. I'll make you a gentlemen's bet with you that the 30 year is over 5% by the end of August.

CP said...

I would rather bet that it hits 4 before it hits 5.

C. Fischer said...

I'd take that bet.. I'll even go 4.04 vs 5.04 since its up 4bps today.

CP said...

Sold to you!

5% would be the highest rate since 2007, but it was below 4% as recently as Q4 2010.

CP said...

Gross was wrong before.

You guys are totally missing that the QEs have been bad for treasuries, not good.

If there had never been any QE, the yield on 30 year paper would probably be zero.

C. Fischer said...


Correlation does not equal causation.

QE2 probably upped inflation expectations, but probably not so much that it completely counteracted the direct effect of the POMO. Commodity prices had been increase well before QE2 was announced.

You can Paypal me that $1 in a few months, Mortimer.

CP said...

The entire bearish case on Treasuries is that Ben is going to devalue them through "money printing" i.e. more "easing" programs.

Once the QE stops the bearish case goes away.

I hope you aren't investing serious money based on your perception of QE and Treasuries.

C. Fischer said...


That is not the entire bearish case. Part of the bearish case is that enormous supply coming online and the tepid demand for them, and another part is rising inflation expectations. You'll probably disagree, but stagflation is still a possibility. In any case, you're STILL buying treasury debt near all time highs, and your bull case seems to be centered around a belief that the market is going to crash.

C. Fischer said...

Remember, the stated goal of QE2 was to reduce borrowing costs. It failed. Do you think Ben announced that as that stated goal, while really thinking it would do the opposite?

As far as condescending comment about "investing serious money", no, I don't hold any treasury debt, I do hold some municipal debt because of the yield protection it offers over comparabile treasuries.

Did you pull the trigger on this trade? You seem to always announce ideas, but not positions..

CP said...

The demand is only tepid because of concern about inflation caused by Ben's easing programs.

If the FDIC limit was lowered to $100k and strictly enforced, it would greatly increase demand.

If corporate taxes were doubled, it would greatly increase demand.

The stated reason for QE2, as you say was to lower rates, but that is absurd on its face.

The real reason was to chase people into risky assets. Now they need to chase them back into government bonds.

Back and forth.

C. Fischer said...

Did you delete my other post where I said the stated goal of QE2?

I disagree about why you think demand is tepid. There is a certainly demand for government bonds. Retail investors haven't bought them in a while. If you all of a sudden triple the new issuance of them, isn't in reasonable to assume the demand isn't going to be there, unless the price goes down?

Why do you think if the FDIC limit lowered back to 100,000 it would matter? How many people have over 250,000 in bank accounts? Plus I've always thought this was overblown, just open up multiple accounts and keep them under 100k.

Sure, if corporate taxes were doubled, it would increase demand for treasuries, and every other instrument not equities. If they were lowered, it would do the opposite. Neither is likely to happen.

Think about this one for a second though: look at Greece, Spain, etc., and the yields on government bonds. Isn't it possible we are entered a new era where government bonds are not considered risk free, as they once were?

The FED has shown a stunning disintreptation of its role, and somehow thinks "higher equity prices" is part of its mandate, I agree, but I don't know that they'll reverse on this anytime soon.

Back and forth is right, but we're still near all time highs for treasury prices..

CP said...

LRSG, seems to be getting further away from your mark...