Time to get out of bonds?
The first report of solid job growth -- whenever that will be -- could send Treasury bonds tumbling, pushing long-term rates higher, even if the Fed doesn't move on short-term rates right away.
And if you happen to believe in buying low and selling high, this is not exactly an ideal time to buy bonds. With yields not much above the record lows set in mid-2003, how much lower can they go?
"If one buys bonds now, one has to expect the possibility of a capital loss over the next six months," said former Fed Governor Lyle Gramley, now a consulting economist with Schwab Washington Research. "I don't worry about prices collapsing or spiking up, but 3.75 percent is an historically low [10-year note yield]."
[And if one buys stocks there is no chance of loss? - mish ]
What's more, the consensus forecast for a prolonged period of low inflation and low rates has some factors working against it: The dollar continues to fall, putting upward pressure on inflation and interest rates
Big federal budget deficits mean the government has to borrow more, increasing the supply of bonds, which hurts prices and tends to push bond market interest rates higher
Prices for commodities, imports and many consumer services are rising -- all of which could translate into gains in consumer price inflation
"This is the way inflation gains a toe hold," Robert Brusca, chief economist at Fact and Opinion Economics in New York, said on Thursday. "The chance to buy bonds is past us," he added. "It is now time to sell them ... if you haven't already."
[This is exactly the kind of horseshit analysis I want to see. New lows in yield coming your way. - mish]
In the short run, however, bond prices could be kept afloat by a number of traders engaging in strategies such as the "carry trade," or borrowing money at cheap short-term rates and then buying longer-term bonds that yield more.
As long as the Fed keeps the overnight rate super-low, the carry trade and strategies like it are safe and should keep demand for bonds relatively high.
What's more, foreign central banks have pumped billions of dollars into the bond market in a bid to keep the dollar strong against their own currencies.
Analysts have prematurely declared the end of the bond rally several times in recent years, but it won't keep going forever.
"For a trader, there are still [short-term] opportunities, but if I were a longer-term investor, I would not want to be holding bonds," said Joseph Shatz, fixed-income strategist at Merrill Lynch.
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Excellent!
Treasuries remain hated.
I think next year we see the 30 yr in the 3's.
Mish
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