In the wake of amusing calls by various Fed presidents about impending rate hikes, Curve Watchers Anonymous has received numerous questions about the US treasury bull market.
Specifically, readers want to know “Is the bull market over?”
From my perspective, the bull market is not over if yields on the long-end of the curve (10 and 30 year duration) make new lows. So, how likely is that?
Yield Curve 2001-Present
Treasury Bear Proclamations
For going on two decades, US treasury bears have called US treasuries “certificates of confiscation“.
Treasury bulls laughed all the way to the bank.
There were some steep selloffs in 2003, 2009, and 2012 leading bears to proclaim the end of the bull. 2015 proved the 2012 proclamation was wrong.
Undaunted, the bears simply proclaimed 2015 the end of the bull market.
Then, with a parade of Fed presidents touting rate hikes for over a year, and with more economists piling on those forecasts, the bears were sure they were finally right.
“Victory at Last!“, thought the bears. But here we are, flirting with new record-low yields on both the 10-year note and the 30-year bond.
And if the economy is sliding into recession (or already in one), or even if the economy simply stalls, the treasury bears will be proven wrong once again.
Yield Curve Flattens
On Friday, in response to a horrific jobs report, yield on the 30-year long bond fell 12 basis points to 2.52% and the odds of a rate hike this year shifted from July to December.
Note the action at the long end of the curve (blue arrows). The trend has been distinctly lower despite all the Fed hawk-talk.
The flattening of the yield curve (short end rising while long end sinks) is not favorable for bank profits or increased bank lending.
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Mike “Mish” Shedlock
So I guess your answer is “No” 🙂
And rates could always go “negative” like they have in other western countries.
no, not yet…..not til debt comes into question as actually being money.
but, geeez, when that day comes ……….and it is…………
If you are going to claim something is a “market”, don’t you need both willing buyers and sellers?
The Fed central planners have cornered what used to be a market. Liquidity has become so bad even the primary dealers are complaining. Delivery fails in the repo “market” are off the charts. Institutions that used to borrow and lend now just park all their cash at the Fed.
The future for US Treasury traders is bleak. Take a look at the “success” of JGB traders in Japan. Anyone have a live quote for Euroyen futures today? How about that lively JGB contract? Somebody please kick the chairs of the cash JGB traders and wake them up — try to convince them they have a buyer other than the Bank of Japan.
Sorry Mish, but you are mislabeling a committee of central economic planners as a “market”. There is no bull market. There is no bear market. There is no market at all.
In what bizzaro economic theory does supply more than double ($8 trillion debt becomes $20 trillion), demand falls (because few have any savings / stocks are only game in town for “rich”) — and yet price goes up?
This is not a market at all. This is central planning on steroids, and Trump/Sanders is the start of ‘roid rage.
“Somebody please kick the chairs of the cash JGB traders and wake them up — try to convince them they have a buyer other than the Bank of Japan.”
Yen will continue to strengthen against $US as carry trade unwinds.
Fwiw, back around February or so Mish did a post on Japanese negative yields and anyone insane buying the debt. I said not so fast – don’t forget currency component. I strongly felt yen would strengthen vs $US … and if you borrowed in $US to buy Japanese bonds you would do well.
Fast forward to today. Yen has strengthened 5% against $US … while yield has remained about the same. Not a bad return for a 4 month investment.
Why buy negative yielding bonds?
Just buy the Yen if you like Yen?
BTW – We will see how much strengthening there is to do. It depends on Abe and not much more
“Why buy negative yielding bonds?”
True. But as it turns out buying 10 yr notes in february (yield of +6bps on February 1st … -6bps on February 29th … current yield -12bps) also would reap capital gain.
“BTW – We will see how much strengthening there is to do. It depends on Abe and not much more”
I’m sticking with my call of 100 yen to $US (possibly stronger) … interesting that yen trend is strengthening until BOJ intervenes …
Just because dot-com stocks or Miami condo prices keep going up did not make them a smart investment (they were highly speculative) — the Fed cornering Treasury prices does not make them any less speculative.
If you think you can out guess what stupid thing Janet Yellen will do next, you join a long list of people who were sure they could exit dot-com stocks and bubble real estate property just before the music stops.
But on the off chance that Yellen doesn’t actually know what she is doing, T-bond speculators will have a really tough time trying to guess what a scared and cornered animal will do next.
You are also betting that the next president doesn’t appoint Paul Volcker Jr to restore a functioning Treasury market (one with multiple buyers and multiple sellers). If the federal government wants to honor some Social Security payments, they will need a functioning Treasury market to do it.
Short term, speculate with money you can afford to lose. But long term, bet on demographics to trump neo-keynesian policy.
“the Fed cornering Treasury prices does not make them any less speculative.”
the “Fed” hasn’t cornered the treasury market.
“If you think you can out guess what stupid thing Janet Yellen will do next,”
The bond market runs the show, not the Federal Reserve. FR only sets the overnight rate. The open market determines the yield curve (which – at times – can be influenced by the FR … ie: investors front running moves). For YEARS now (almost) all “experts” have predicted higher rates … all the while the downward trend in yields continued.
@TB — the “Fed” hasn’t cornered the treasury market.
The Fed bought more than 75% of net treasury issuance last year — a far bigger market share than OPEC ever had in oil, and a lot more than when the Hunt brothers cornered silver. Think you need to do some better fact checking before commenting
@TB — “The bond market runs the show, not the Federal Reserve.”
Primary dealers actually trade treasuries in the real world, and they have a very different view than your cloistered academic theory.
While The Fed doesn’t directly control long rates; by providing a wash of liquidity and signaling it’s intent to continue to do so unabated, it is still the biggest factor behind their record lows. If there was no semi credible BOJ backstop, long bonds in Japan would long ago have gone to virtually nothing, as they are simply and obviously not repayable absent base money inflation. Ditto for most countries in the West.
“The Fed bought more than 75% of net treasury issuance last year”
QE3 ended in 2014.
Since then FR has only reinvested maturing principal.
“Primary dealers actually trade treasuries in the real world, and they have a very different view than your cloistered academic theory.”
So? They are among the “experts” who thought/think yields will rise. Cloistered academic theory? Bernanke/Yellen have been running that playbook … to dismal results.
“While The Fed doesn’t directly control long rates; by providing a wash of liquidity and signaling it’s intent to continue to do so unabated, it is still the biggest factor behind their record lows.”
A factor? Yes. But a lot of moving parts in determining yield.
Where does the Treasury Department issues debt along the curve?
Does municipal debt start to blow up in earnest (treasuries will be good proxy)?
UST market object of carry trade?
Size of USG deficit?
Etc.
Federal Reserve plays a role … nothing more.
Once it is widely recognized that the US economy is indeed in recession and corporate profits nosedive – with stock prices at all-time highs – there will be a mad rush to get out of stocks.
There is simply nowhere else for that money to go, other than US Treasuries.
So, no – the bull market in US Treasuries is not over. Not even nearly over. There will be a “blow-off” type event sometime near the (official) beginning of the next recession that could perhaps mark “the beginning of the end”.
US headed for deflation in next few years.
Treasuries are the caboose domino … the current yield of 1.73% on 10yr will be wistfully remembered by investors in the not too distant future.
Oil might buck the path to deflation, the west does not have that much ( italics) control, more the opposite, the ability to raise energy prices if need be.
You need to pick a more accurate term than “deflation”. Whatever it was supposed to mean in textbooks, it makes you sound foolish when you use it to describe the US economy.
The cost of living is absolutely positively going up — even according to the laughable statistics like CPI. There was no deflation, there is no deflation, and almost impossible for there to ever be inflation as long as there is a central bank.
If you mean prices of stuff where supply exceeds natural demand — used cars, stocks, some commodities, promises from political leaders… yeah, those things are way overpriced today and are likely to see lower prices in the future
“You need to pick a more accurate term than “deflation”. Whatever it was supposed to mean in textbooks, it makes you sound foolish when you use it to describe the US economy.”
Year over year CPI will at some point be negative.
“The cost of living is absolutely positively going up”
Sure … for now
The coming recession will – overall – be deflationary. Some things will still go up … some things will go down. Too much debt and not enough income will force cutbacks across the board.
@TB — “Year over year CPI will at some point be negative.”
Not over the life of a ten year note it will not. That didn’t even happen during the Great Depression in the 1930s.
@TB — “Too much debt and not enough income will force cutbacks across the board.”
You are confusing debt default with deflation. As I said, your definition of deflation is messed up
Greg – deflation definitions vary as you know. Price, money supply etc. . Here is one that hasn’t been studied much, amount of ‘real effort’ that has to be used to obtain ‘something’ by an ‘average’ person ( could try ‘person’) that it actually costs ( debt and non payment allowed) to be able to benefit or gain use of that ‘ something’.
By that measure in the west we have had deflation, prices may have gone up, but productivity and supply and quality has increased immensely in comparison with actual effort.
Say it ain’t so.
However, now, as accounts start biting, a lot of ‘average people ‘ are getting pushed back down, left behind, and to them it is one long path downwards where what they used to ‘afford’ slowly moves out of reach… but the worst of it is that they find they no longer have a place in society, because those that ‘run it’ insist that it adapt to their plans, not its own.
Those on the outside get trampled, and you could call that deflation also, if only of self worth.
“You are confusing debt default with deflation. As I said, your definition of deflation is messed up”
Don’t go be putting words in my mouth.
NOWHERE did I mention default. Too much debt (pulling forward demand) will take an ever bigger piece of the income pie to service … at the expense of current connsumption.
“Is the bull market over?”
See everyone @ 1% on the 10yr note.
This post should rattle the cage of socalbeachdude/Adam Price and his call for 4 rate hikes in 2016 … and 10yr to hit 3.25% “very soon”.
I’m waiting for you in the middle of the ring …
Rick Ackerman, who is a pretty accurate big-picture forecaster, is calling for an eventual low of 1.64% on the THIRTY YEAR Treasury yield.
That would imply about a 1.00% yield on the 10-year, so I have to say I agree with you both.
There’s still plenty of money to be made being long Treasuries if that is the case.
Makes sense … yield curve will continue to flatten.
My long range prediction for the 10Y was sub 1%. Given what has happened in the rest of the world in the last 2 years, I would guess sub 0 is a reasonable guess.
In the limit of full monetization, shouldn’t the nominal yield of all government bonds approach zero, and full monetization is the end-point. Just note the recent upsurge in discussions about the BOJ and JGBs from the mainstream economists- the talk is now to go further and buy it all up and forgive it. We already know how this ends- a currency collapse that happens all at once.
“In the limit of full monetization, shouldn’t the nominal yield of all government bonds approach zero, and full monetization is the end-point.”
I can see further QE (as $trillion deficits return in upcoming recession) but no way full blown monetization. US will have benefit of watching OTHER central banks go Full Retard first … and accompanying disastrous results.
At the end of the day US will do the right thing … cut spending … increase the tax on wealth.
If there is any wealth left.
The end play is that a fiat, which gains its credibility by government legal dictate, disconects from any real market value, leaving us face to face with dictate.
That dictate may be Venezuela style, it may be a form of extreme socialism, it may be a completely fascist installation of order, or we might even see a sensible devolution of power. Even the latter is frought, exactly who does power get devolved to and on what basis? It in itself implies redistribution, the more it changes the more it stays the same…
It seems various power’s main ambition is to dilute themselves into each other to a point that evades all previous recognition. At that point ‘nation’ will have little meaning and I expect the politic of the time will evolve around structuring an evolution that is underlined by the concept of a common destiny.
What better way to ‘sacrifice’ a western leading position that could not be maintained , to claim a top seat in global development?
Although we may disagree, the alternative waved our way is the threat of war or hard isolation… so it is no wonder people follow the trail, even if it is only to get rid of their own leaders and the menace they wield.
I suppose not everything about a global government need be bad, but we would be fooling ourselves to think that the world is anywhere near prepared for that… centuries if not more, barring an apocalypse.
Similar goes for EU, it is futurist but you cannot force it into the present in the current unnatural manner, just a power grab that makes a mockery of any true intent.
Maybe this is how it should be, repeated attempts and failures, but I think that a natural evolution would be much more gentle and voluntary, very slowly accepted at individual level, learning from the successes of others while being free to reject the failures. Surely eventually a common understanding would form without any imposition, without any need for quantum shifts in the surrounding reality or individual identity.
no……at the end of the day the US will default by print-to-fund……..anymore tax on wealth and that wealth leaves.
“wealth leaves”
to where?
US will be least “crazy” of options available.
Julian Robertson moved to New Zealand. Jim Rogers moved to Singapore. The founder of Cambell’s soup moved to Ireland. A record number of wealthy people renounced their US citizenship last year.
Meanwhile, a lot of political insiders have shifted their money into tax exempt “foundations” that they still direct and draw a salary from– the Clintons being an obvious example, but also George Soros, actor Kevin Spacey, MSFT’s Bill Gates and Facebook’s Mark Zuckerberg.
Jerry Seinfeld and Jay Leno have their money in collector cars and royalty rights. Michael Jackson’s estate and Beatles guy Paul McCartney have their money in real estate and music royalties (besides their own). CNN founder Ted Turner has his money in ranch land that has special tax status (preserving green space) spread across Canada, US, Mexico, and South America. Dozens of hollywood actors have bought land in Chile / Argentina.
NYC mayor Mike Bloomberg got into hot water during storm Sandy because he was at his palatial estate in Bermuda, where he is having property disputes with several hedge fund managers.
Hip hop moguls and hollywood actors own dozens of whole islands in Bermuda and Canada. George Clooney apparently spends most of his time at his villa in Italy. Madonna owns a castle and huge vineyard where she lives in England.
How many US citizens were on the so-called Panama list?
And lets talk about the multi-billion cash piles Apple corporation (and many others) keep anywhere but the USA….
That is just mentioning a few examples in the news the past couple years.
So any sell off in equities will by definition cause yields to RISE not fall. Since the purpose of a “Bailout Regime” is to keep interest rates at or near zero forever (Japan) to second problem arises “what about equities and real estate?” In Japan these other two asset classes have never recovered since Nikkei 40,000 over almost thirty years ago.
And the answer was “make it infinity” (QE plus forward guidance.)
To say this worked spectacularly well “financially speaking” is an understatement….but as with Japan and Europe no formalized economic recovery worthy of the name ever transpired either.
These are just the prima facie facts of “Our Central Planning” as a solution to, well…nothing actually.
So now we come to the present circumstance…”The Death of Kings” to quote Shakespeare.
And guess what….murder, mayhem, corruption, insanity….looks pretty ugly!
But that’s okay! The media has told you all is well…so just repeat after Jamie Dimon and tell everyone “all is well! Start buying!”
And what’s so hard about that?
Has it not been absolutely right?
Hey Mish,
Have a breeze through the new BIS standards on the margining of derivatives here http://www.bis.org/publ/bcbs261.pdf
In essence there is a coming enormous demand for collateral – goodness knows how much but it must be absolutely huge. What is also coming, if you look at 5(iii) on page 19, is the need for that collateral to be in securities and not in cash. And given that haircuts apply to securities based on ‘quality’ government bonds will be very much in demand even to the point of what must seem like ridiculous negative rates.
I do not know how this will play out; no-one does. I do know that Salvador Dali himself could not have painted our financial system.
Geoff (PS prefer not be attributed)