Thursday, October 18, 2012

Yes! ($TLT)

Great post from Calafia Beach Pundit, echoes something I've been saying about the Treasury market for a long time:

"Fed purchases of Treasuries these days are only a small fraction (less than 10%) of the non-Fed-held federal debt held by the public, which is almost $10 trillion. It strains credibility to think that $40 billion in purchases of new debt can massively distort the value and the current yields on $10 trillion of outstanding debt which is owned by individuals, corporations, and large institutional investors all over the world.
[...]
From this I think it is clear that QE is not the driver of low Treasury yields. The real driver is deep-seated pessimism over the outlook for economic growth. The market believes the Fed when it says that it will keep rates very low for a very long time, because the market does not believe that there is much chance of enough growth or inflation in the next several years to sway the Fed from delivering on its promise."

7 comments:

Stagflationary Mark said...

Absolutely!

I wasn't buying TIPS because of the Fed. I was buying TIPS in spite of the Fed.

The market thinks the Fed has driven interest rates down to fend off a Great Depression.

So ask yourself this. If the Fed had done nothing and we were definitely in a Great Depression, then where would interest rates be right now?

I say they would be even lower. That's been my theory since 2004 and I'm sticking to it.

It's all just a ruse. An illusion! Our economy can no longer tolerate high interest rates.

That's not to say we couldn't get high interest rates someday. It won't be because of exceptional growth though. The 1980s and 1990s are over. Sigh.

Stagflationary Mark said...

Speaking of poor economic growth, check this chart out.

CP said...

Absolutely.

That has been my contention forever (look at the TLT tag on the blog) and I made money trading it last year (Bill Gross botched that one).

P.S. I am getting more bullish on the economy. You should go out and about and see what's going on.

Stagflationary Mark said...

At the risk of babbling on, this is exactly why I embraced the real yields of long-term TIPS. It is a pure play on lousy long-term real economic growth.

I'd be willing to sell my TIPS if I thought long-term real economic growth couldn't deteriorate even further. Sigh.

As for the economy, my girlfriend has a part time job that is supposed to give her 25 hours per week. She's worked a grand total of 3 hours in the last month. They just don't need her to work. Is she unemployed? Well, not technically.

Our problems are not cyclical. I have never been more bearish on this economy. We are NEVER going to return to this trend.

And check this trend out.

Most seem to think that a recession can't happen with such an accomodative Fed. I am in another camp. I don't think the Fed has permanently put a stop to recessions. If I am right, then the next recession is going to scare the @#$% out of people.

portland_allan said...

It strains credibility to think that $40 billion in purchases of new debt can massively distort the value and the current yields on $10 trillion of outstanding debt which is owned by individuals, corporations, and large institutional investors all over the world.

Well, it doesn't strain my credibility at all. As the equity shorts know well, the operative question always is "what's the float." Of those 10 TD, how many are actively traded? Of the new debt being issued, how much is the Fed buying? About half if memory serves.

As that one guy said about going bankrupt, it happens slowly at first, then really fast at the end.

The Fed is attenuating normal market signals so that they won't hear the usual warning bells. It's going to go south really fast, none of this telenovella stuff we've been getting out of Europe. Nope, just like the stock and mortgage bubbles, when the fiat bubble pops, it's going to be fast.

That said, I don't see it in the eminent future. I console myself that I did see the tech and mortgage bubbles ahead of their pop. <knock-on-wood>

CP said...

The public debt is very very actively traded. In fact, it's alarmingly active - the average holding period of a 30y bond was something like a month last time I checked and I'm sure it's even lower now.

portland_allan said...

What's the median? I suspect a moderate number of active hedge funds at the margin cycling a number of bonds amongst themselves, and which the Fed influences, and a much larger in magnitude of dollars of buy-and-holders which excepting China's saber rattling buy-and-forget.