Forsythe/Barrons on rising long bond rates.........
But, says Lacy Hunt, chief economist of Hoisington Investment Management, an Austin, Texas, manager of $4 billion in assets, "The sharp rise in Treasury yields isn't a result of an economic recovery. That occurs when income, production, employment and sales, simultaneously, turn higher. Presently, these indicators merely show a lessened rate of decline."
Nor can the burgeoning Treasury borrowing needs fully account for the rise in yield, he adds. The ratio of government debt to gross domestic product showed massive increases in the U.S. during the 1930s and 1940s and in Japan since the 1990s, yet yields continued to decline.
So, what accounts for the sharp rise in Treasury bond yields? Blame at least some of it on the intricacies of the mortgage market. When mortgage rates are falling, investors buy noncallable Treasuries to offset the effect of homeowners' refinancing. When rates rise, they reverse that hedge, selling the Treasuries and exacerbating the rate rise.
This can amount to huge sums. According to an estimate by mortgage-securities-market veteran Alan Boyce, writing for Drobny Global Advisors, these hedge sales are equivalent to issuance of $1.1 trillion of 10-year Treasury notes, compared with expected sales of $250 billion of that maturity this year.
The upshot of all this: The Treasury long bond now offers a real (after inflation) yield of 4.5%, twice the historic average, according to Charles Dumas of Lombard Street Research. The poor outlook for the economy, in the U.S. and abroad, argues for below-average real rates while inflation is apt to head to zero. Only the unlikely combination of strong domestic consumption in China, Japan and Germany can justify such a high real U.S. bond yield, he concludes.
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This is certainly a plateful to digest. How subtle but overwhelming. Sometimes I think myself the fool for ever investing w/o understanding these dynamic effects. Yet another positive feedback loop built into the system.....so important to completely grasp:
When rates rise, they reverse that hedge, selling the Treasuries and exacerbating the rate rise.
So another self fulfilling prophecy. Another factor to keep driving real estate prices down. Another reason for the Chinese to either dump or refrain from buying US Treasuries - all to the effect of forcing LT rates higher...so Bernanke has to print more to buy more to further inflate and drive rates higher.
One might think that long rates could move back down given their high real rates reflecting false economic recovery hopes. OTOH, if recovery comes, then the motivation to correct down would be removed and possibly reversed. And we all know that when recovery comes, the FED will immediately (if not beforehand) start dumping its bloated balance sheet to force rates yet higher.
Girls and boys, this ends ugly. Some economist quipped this week that the green shoots are poison ivy. So easy to interpret rising long rates as a sign of recovery.
Zombie banks. Zombie citizens. Zombie nation.
That bad debt will get written down. It is bad. Its that simple. We can play games and put off the day of reckoning - all the while increasing our pain and collateral damage - but the stuff is no good.
these hedge sales are equivalent to issuance of $1.1 trillion of 10-year Treasury notes, compared with expected sales of $250 billion of that maturity this year.
Unbelieveable. I remain long the TBT. |
