POLL: Fed and interest rates

[thefatbaboon]

You're probably right, I have exaggerated and perhaps it's unfair.  And I don't really mean my argument to be taken to it's extreme.  But what I don't get here is the Why?!  Why do they bother with such contrarian positions when they are not compelled to by inflationary pressure?  I understand standing against the crowd pushing rates low when markets are collapsing and market forces have rates stubbornly high.  I understand standing against the crowd have lifting rates if the economy is over heating and inflation has gone past target.  But I don't understand being a stubborn contrarian when there is no need.  As things are they are simply behind the market, a kind of parrot with delay. 

 

1.  Powell: we are a long way from neutral and will have to raise many times.  Market: you might have reached neutral and raising might not be good idea.

2. Powell: we are less sure where neutral is, but we will raise at least twice next year and run off the balance sheet on auto.  Market: you've probably past neutral, and you won't raise at all next year.

3.  Powell: we probably won't raise at all this year.  Market:  you'll probably cut.

4.  Powell, we might have to cut....etc etc

 

 

And all this why?  Inverting the curve, having all durations cheaper than overnight! Why do that? Is inflation running at or past target?  Powell is peculiar and a stark contrast to the thoughtfulness shown and expressed by Yellen during her tenure.

 

 

 

[Jurgis]

Why should fed cut here? Economy is doing great, stock market is doing great, unemployment is super low, rates are very low historically speaking ( what RuleNumberOne said ). Everyone's in the market and they want the fed to cut to get 1999 repeat? And what next? Just give us another bubble?

 

I think fed should raise rather than cut. But hey just go with the market lemmings experts.

[Gregmal]

I do find it amusing that the geniuses at the Fed take 2-3 quarters longer than even the average person to realize what is going on. I don't think we need a rate cut now, but I also dont think we needed nearly as many as these idiots gave us the last couple years.

[Jurgis]

Why should fed cut here? Economy is doing great, stock market is doing great, unemployment is super low, rates are very low historically speaking ( what RuleNumberOne said ). Everyone's in the market and they want the fed to cut to get 1999 repeat? And what next? Just give us another bubble?

 

I think fed should raise rather than cut. But hey just go with the market lemmings experts.

 

I think your take is actually pretty close to the Fed’s baseline forecast, namely the economy does fine and they don’t cut during 2019.  The reason they’re slightly more dovish than what you think is appropriate is that they now see some negative economic indicators showing up and inflation is undershooting their target. 

 

What I find pretty strange is the extreme confidence with which the bond market is predicting multiple rate cuts this year and how happy Mr (Stock) Market seems to be about all this.  The Fed has pretty much indicated that rate cuts are not forthcoming this year unless the economy starts deteriorating.  So if the bond market is right and rates are going down big time that means the economy is going to do pretty badly.  Will stocks do great under such circumstances?  I don’t think so.

 

Well said.

[Spekulatius]

Why should fed cut here? Economy is doing great, stock market is doing great, unemployment is super low, rates are very low historically speaking ( what RuleNumberOne said ). Everyone's in the market and they want the fed to cut to get 1999 repeat? And what next? Just give us another bubble?

 

I think fed should raise rather than cut. But hey just go with the market lemmings experts.

 

I think your take is actually pretty close to the Fed’s baseline forecast, namely the economy does fine and they don’t cut during 2019.  The reason they’re slightly more dovish than what you think is appropriate is that they now see some negative economic indicators showing up and inflation is undershooting their target. 

 

What I find pretty strange is the extreme confidence with which the bond market is predicting multiple rate cuts this year and how happy Mr (Stock) Market seems to be about all this.  The Fed has pretty much indicated that rate cuts are not forthcoming this year unless the economy starts deteriorating.  So if the bond market is right and rates are going down big time that means the economy is going to do pretty badly.  Will stocks do great under such circumstances?  I don’t think so.

 

Either everything is good news or everything is bad news. Right now it’s a former.

[Viking]

US bond yields have fallen precipitously so far in 2019. Some are now forcasting a move in the 10 year to 1.5%  in short bond yields are cratering. Today the bond market is forcasting the Fed will be cutting 3 times this year with the first cut coming in July. The bond market is freaking out about something.

 

The stock market is hitting all time highs. One of the reasons is because the Fed will be cutting and many times.

 

The elephant in the room is the US economy. Are bond yields cratering because the bond market sees economic growth in the US slowing dramatically (below current expectations)? What will cause the Fed to cut 3 times in 2019? What does the stock market see that is pushing averages to all time highs?

 

Bad news has now become good news. And the badder the better! I really do not understand what is going on :-)

 

 

 

 

[John Hjorth]

Viking,

 

In the "Buffett/Berkshire - General news" topic some of us discussed recently the issuance by Berkshire of 20 & 40 years debt at very low rates. There, shalab proposed, that what's going on with the US yield curve [at least partly] may be explained by capital inflow from Europe seeking better yields [perhaps both short and long yields]. That explanation makes sense to me, at least as an explanation partly.

 

The sentiment now popping up about rate cuts in the US by FED certainly also has moved the USD/EUR pair a bit, making the USD weaker relatively. When I look at my portfolio, I was at all-time-high on April 29^th, measured in DKK [, pegged to EUR].

 

- - - o 0 o - - -

 

No matter that, it feels discomforting to observe this phenomen.

 

Personally, I try not to think too much about it, trying to tune out all the noise, simultaneously improving my internal rating & popularity by taking care of my other compounders : Roses [mainly climbers & ramblers] and hostas, and building up the lawn again after last years drought. [ : - ) ]

[TwoCitiesCapital]

The Fed has pretty much indicated that rate cuts are not forthcoming this year unless the economy starts deteriorating. 

 

I probably need to revise this.  It's becoming increasingly clear that the Fed is going to cut rates as a "pre-emptive" measure, even though the US economy seems to be doing just fine at the moment.  I don't understand why they think that's a good idea, but it looks like there's been a regime/paradigm shift in their thinking.

 

Other things equal, I think this makes a stock market melt up similar to the one in the mid-late 1990s a lot more likely.  I imagine speculators are bidding up stocks in anticipation of that as we speak...

 

We'll see. I'm currently of the belief that while you might see stocks bid a day or two after the cut, it's basically priced in at this point and any cut will be seen as concession that things aren't as rosy as equity investors are pricing in.

 

Any cut simply means that weakness that used to be "transitory" is not necessarily. We're still seeing broad deterioration/deceleration in a lot of respects  - for example the Conference Board's Leading Indicators index turned negative for the first time since December in the June release this morning.

 

The only thing that's held up is employment and employment is largely a lagging indicator IMO.

 

I think a cut could be the confirmation of the next down cycle more than a continuation of the current one.

[RuleNumberOne]

Negative rates in Europe have inverted the US yield curve.

 

Dan Fuss:

https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000

 

"The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. "

 

Fed chief Powell said 2 days ago:

 

https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html

 

“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

[TwoCitiesCapital]

Negative rates in Europe have inverted the US yield curve.

 

Dan Fuss:

https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000

 

"The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. "

 

Fed chief Powell said 2 days ago:

 

https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html

 

“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

 

While I don't disagree with the statement overall, I'd like to see flows information confirm it.

 

It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years.

 

Is there any flow data supporting foreign buyers?

[RuleNumberOne]

BofA CEO said the same thing - European investors are buying our bonds and driving yields down.

 

In Europe, clients have put cash into vaults instead of checking accounts (see WSJ link below). They must be buying Treasuries too. Who knows what wealth confiscation crookedness the European Collectivist Bank may come up with next. I think for Europeans, buying Treasuries is protecting themselves against wealth expropriation.

 

https://www.wsj.com/articles/negative-rates-designed-as-a-short-term-jolt-have-become-an-addiction-11558363559

 

If you were thinking of buying real estate to shield against negative rates, Berlin showed the way with a retroactive rent freeze.

[RuleNumberOne]

I think all the parties below would prefer to buy Treasuries and not worry too much about currency hedging costs. ECB is looking to make rates more negative. Maybe people who invest other people's money and chase "benchmarks" might buy peripheral debt. But if it is your own money, you would want Treasuries.

 

https://www.wsj.com/articles/negative-rates-designed-as-a-short-term-jolt-have-become-an-addiction-11558363559

 

"Larger banks have shielded individual depositors while charging negative rates to large clients such as pension and hedge funds.

 

Some banks report major depositors have asked to park their physical cash in vaults—where it avoids incurring negative rates it might when in the form of electronic deposits but also does no good to the economy.

 

In Switzerland, some individuals are putting cash into real estate, prompting fears of overbuilding. “Holding cash,” said Swiss Bankers Association chief economist Martin Hess, “is simply more expensive than building an empty house.”"

 

 

[TwoCitiesCapital]

I think all the parties below would prefer to buy Treasuries and not worry too much about currency hedging costs. ECB is looking to make rates more negative. Maybe people who invest other people's money and chase "benchmarks" might buy peripheral debt. But if it is your own money, you would want Treasuries.

 

https://www.wsj.com/articles/negative-rates-designed-as-a-short-term-jolt-have-become-an-addiction-11558363559

 

"Larger banks have shielded individual depositors while charging negative rates to large clients such as pension and hedge funds.

 

Some banks report major depositors have asked to park their physical cash in vaults—where it avoids incurring negative rates it might when in the form of electronic deposits but also does no good to the economy.

 

In Switzerland, some individuals are putting cash into real estate, prompting fears of overbuilding. “Holding cash,” said Swiss Bankers Association chief economist Martin Hess, “is simply more expensive than building an empty house.”"

 

Potentially, but most institutional investors aren't going to buy Treasuries without hedging.

 

Currencies are seriously volatile and you can lose several years of interest payments on a single move in the currency over a 12-24 month period.

 

Why escape negative rates of a fixed amount to open yourself up to loss of an unknown amount if currencies shift?

 

In 2016, most foreign buyers in developed countries could buy the Treasury, hedge the currency, and still come out ahead of their local bonds. I don't think that's been the case since 2017 or so, but am less certain since I don't follow currency swaps as part of my job any more.

 

I would be curious to see data support the talking point instead of everyone parroting the same line that's been parroted since 2016, because it wasn't true in 2017 or early 2018 and people were still saying the same things.

[Cigarbutt]

Negative rates in Europe have inverted the US yield curve.

 

Dan Fuss:

https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000

 

"The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. "

 

Fed chief Powell said 2 days ago:

 

https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html

 

“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

 

While I don't disagree with the statement overall, I'd like to see flows information confirm it.

 

It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years.

 

Is there any flow data supporting foreign buyers?

If the references I looked at are correct, US government debt held by foreign entities has increased ++ after the last recession but has relatively plateaued.

https://fred.stlouisfed.org/series/FDHBFIN

However, the US government has issued debt at a rate much higher than GDP growth and somebody/somewhere has been piling up. In percentage terms, US government debt held by foreign entities over total US government debt (as per the Treasury Department) has risen from about 25% entering the Great Recession peaked at around 34% in 2013-6 and is now on its way down to 29% even if absolute numbers keep going up. Remember also that the Fed has recently been a net seller of government debt. Against all odds, rates have gone down despite the increased supply and demand from US individuals and institutions (including banks) seems to be the driving force.

Here is official data showing what happened recently (over a year-period when public debt increased by 960B).

https://ticdata.treasury.gov/Publish/mfh.txt

From a bird's eye view it seems that the fear and greed spectrum looks more and more like the bimodal distribution that is becoming obvious in other segments which cannot be discussed in investment threads. The US continues to have the cleanest dirty shirt but it's getting dirtier in our beg-thy-neighbor world.

[TwoCitiesCapital]

Negative rates in Europe have inverted the US yield curve.

 

Dan Fuss:

https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000

 

"The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. "

 

Fed chief Powell said 2 days ago:

 

https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html

 

“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

 

While I don't disagree with the statement overall, I'd like to see flows information confirm it.

 

It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years.

 

Is there any flow data supporting foreign buyers?

If the references I looked at are correct, US government debt held by foreign entities has increased ++ after the last recession but has relatively plateaued.

https://fred.stlouisfed.org/series/FDHBFIN

However, the US government has issued debt at a rate much higher than GDP growth and somebody/somewhere has been piling up. In percentage terms, US government debt held by foreign entities over total US government debt (as per the Treasury Department) has risen from about 25% entering the Great Recession peaked at around 34% in 2013-6 and is now on its way down to 29% even if absolute numbers keep going up. Remember also that the Fed has recently been a net seller of government debt. Against all odds, rates have gone down despite the increased supply and demand from US individuals and institutions (including banks) seems to be the driving force.

Here is official data showing what happened recently (over a year-period when public debt increased by 960B).

https://ticdata.treasury.gov/Publish/mfh.txt

From a bird's eye view it seems that the fear and greed spectrum looks more and more like the bimodal distribution that is becoming obvious in other segments which cannot be discussed in investment threads. The US continues to have the cleanest dirty shirt but it's getting dirtier in our beg-thy-neighbor world.

 

I think this supports that we cannot believe that it's foreign buyers. Foreign held treasuries have increased slightly since 2016, but at a far lesser rate than the supply which results in them owning a significant % of the total supply less than their peak in 2016 (as you pointed out).

 

If foreign buyers went from 34% ownership of the Treasury market to 29%, they certainly can't be the cause of the recent drop in rates - someone else had to absorb their 5% reduction along with the increase in new supply.

[RuleNumberOne]

I would tend to believe the BofA CEO because he has the whole of Merrill Lynch at his disposal to find out what's going on (does anyone here know why the Treasuries held by "private investors" has more than doubled from $6 trillion to $14 trillion in the graph from the same website linked below?). But whether or not it is foreign buyers, let us look at the duration risk.

 

- The Austria 100-year bond first issued in 2017 saw a few more taps some days ago at 154% of face value (yield around 1.1%). If it were to revert to 100% of face value, buyers would get an immediate capital loss of 35%.

 

- Italy 50-year bond yields were at 2.85% recently.

 

- One-percent rate increase in the Bloomberg-Barclays sovereign debt index results in a loss of $2.4 trillion.

 

- Greek and Italian government debt yields less than US government debt. The only way you would not buy US Treasuries is if the European regulators block it. I mean US 3-month Tbill yields more than Greece 10-year.

 

https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuries/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

[RuleNumberOne]

Apart from the huge losses if interest rates move up even by 1%, the USD/EUR has gone from 0.74 five years ago to 0.89.

 

Buying the 100-year Austria bond is so much more risky than the S&P 500. A 1% increase in rates would result in a capital loss of 35% for the 100-year bond. It would take a severe bear market for the S&P to give you a 35% loss. At least you know if the S&P goes down 35%, it will surely be back up in a few years.

 

Today's news as Italian coalition government looks like it might fall apart (their 10-year yield jumped 7 bp to 1.62%):

https://www.bloomberg.com/news/articles/2019-07-19/salvini-under-the-gun-as-clock-ticks-down-on-italy-snap-election

 

"The spread between Italy’s benchmark 10-year bonds and German debt of similar maturity widened almost 10 basis points to 195.5 basis points. "

 

 

[Viking]

RuleNumberOne, i just shake my head at where yields are at today. What i wonder, however, is what if yields fall lower. Instead of a 1% or so move higher, what if we see a significant move lower? I am now wondering not if but when 10 year US treasuries go to a negative yield.

 

The Fed appears to be giving financial markets whatever they want. We are going to get a rate cut shortly, even with the economy doing ok. Should the economic data get worse, the Market will clamor for more and the Fed will oblige. As the US cuts, the $US will go down. Other central banks will then also cut (or engage in more QE). And we will have a race to the bottom. Lots of things going on that i clearly do not understand :-)

[JimBowerman]

imo flows are only relevant in the short run (and even then i'd be skeptical).  Its like saying the reason KO went up in the 90s was because Buffett was buying 1/3 of the daily volume in the late 80s.  Buffett's flow of money into KO wasn't the reason it went up over the past few decades. It was KO fundamentals

 

We've had a decade now of low interest rates. No QE for 6 years. Can we really keep claiming its the flow of money into treasuries that is keeping yields low?  Maybe it's not low interest rates in EU or flows that is causing low rates in the US.  Maybe the market is correct to expect to NGDP growth for the future and thats why yields are low?

 

2-3% yields in a 4% NGDP world is pretty normal. If folks think we are getting 6% NGDP growth (and 5% bond yields) that would have to be the trade of a lifetime.  Short a drastic change in central bank policy we aren't seeing 5% yields for a long time...like decades

 

 

[John Hjorth]

... In terms of investing, I think owning high quality real assets is the way to go if all this monetary stuff keeps you up at night.

 

I certainly agree with you here, SHDL,

 

Personally, I think this capital inflow of institutional money from Europe to the US bond market must be a temporary phenomena, that eventually will dry up. That money is also regulated money, so one can't go totally haywire/heavy in US [uSD denominated] bonds assuming large amounts currency risk on a low yield asset. Hedging costs will create an equlibrium, I think.

[Spekulatius]

If I had to condense what's  happening with respect to interest rates I would say that the world is long central bank confidence and short common sense.

 

I have no idea what is going to happen and how it ends, but I think it could be a trip to financial market hell like in 2008 and possibly worse.

 

Going long real assets like real estate, gold, land etc. seems to be one way to escape. Even buying bitcoin seems to me a better bet than buying a 100 year bond yielding nothing. At least with bitcoin, you have a chance to make money (vs fiat currency ), while with a 10” year bond, you are almost guaranteed to be a loser.

[RuleNumberOne]

Viking, negative rates will never come to the US, because they harm the economy rather than help. Bernanke, Greenspan have spoken against it. They don't make any sense anywhere. I think the Fed is making the 25bp cut to expand the NIM for banks.

 

The ECB force-fed negative yields to their savers/pension funds/banks/insurance companies just so that they could keep Italy and Greece in the European Project and French banks solvent. The upside of driving Italy/Greece borrowing costs so low, has come at a great cost. They have created a huge bond bubble that they are too afraid to prick.

 

I think the Eurocrats started by ramming the negative yields down the throats of their savers. But then it took on a life of its own as evidenced by the 100-year bond where you take the risk of huge downside for the upside of a 1% yield. At least with the S&P 500 the upside is unlimited.

 

In the current bond bubble, unscrupulous politicians could probably issue a 0.01% rate 200-year Tulip bond - the bond buyer can choose to get redeemed in either Tulips or Euros (since Tulips are guaranteed to be around in 200 years, and be worth something at least, unlike the Euro.) With the proceeds of the Tulip bonds, the politicians can provide everyone a new car every 2 years, a new boat every 3 years, and a new plane every 5 years.

 

RuleNumberOne, i just shake my head at where yields are at today. What i wonder, however, is what if yields fall lower. Instead of a 1% or so move higher, what if we see a significant move lower? I am now wondering not if but when 10 year US treasuries go to a negative yield.

 

The Fed appears to be giving financial markets whatever they want. We are going to get a rate cut shortly, even with the economy doing ok. Should the economic data get worse, the Market will clamor for more and the Fed will oblige. As the US cuts, the $US will go down. Other central banks will then also cut (or engage in more QE). And we will have a race to the bottom. Lots of things going on that i clearly do not understand :-)

[RuleNumberOne]

Spekulatius, I completely agree. It is hard to believe grown-up, purportedly literate adults could create such an environment.

 

I was trying to work out maturity by maturity, using zero-coupon bonds. It probably went something like this:

 

1. One-year bonds.

Eurocrats: "We have engineered the one-year yields to be negative. Why aren't you pension funds buying?"

Pension fund says: "We are not suicidal. We have pensions to pay."

Eurocrats: "Hey, fu. Who do you think you are? You little pension fund, you! The law says you have to buy, just buy it!"

 

The one-year zero-coupon bond bought at $102 turns into $100 at the end of the year. Soon, companies reduce pension fund contributions and pay the money directly to employees instead, since money in the mattresses/bank vaults is a better investment.

 

2. Five-year bonds.

Eurocrats: "Here are 5-year bonds. We have negative rates guidance for the next few years. Spread the word and trade this with your friends."

 

The one-year zero-coupon bond bought at $102 turns into $103 at the end of the first year, and $105 at the end of the second year. Then they head south because they turn into $100 at the end of the fifth year.

 

By now the banks are busily building more vaults for clients, insurance companies are going broke. The ECB has even started regulating the number and size of bank vaults.

 

3. Ten-year bonds.

Eurocrats: "Hey, this time we have increased our negative rates guidance and you can trade the 10-year with your friends."

 

The bonds go up for the first few years and then head south. Since bank employees still need bread to eat and clothes to wear, they have to punish depositors even more to create a spread. By now, all wealthy Europeans have moved all their assets abroad in the dark of night. Housing bubbles and rent controls pop up everywhere.

 

4. 100-year bonds

Eurocrats: "At last we have found the solution. We created a 100-year Tulip bond, as in, we take real Euros and return Tulips a 100 years from now. You can trade this to the skies. Tell your friends. Spread the word. It is just like a stock without a P/E, your imagination is the limit!"

 

Bond fund managers: "If we don't buy these 100-year Tulip bonds right now, we will miss our benchmarks and be out of a job. Look at my former classmate over there, he made 55% on those Austrian Tulip bonds bought 2 years ago. I need to take some of that imagination medication he uses."

 

Politicians: "Everybody lives in a marble palace from now on. You don't need to go to college, even if you do, you don't need to graduate. We will give everyone a big free house and a new car every 2 years. Everybody makes the same income as a brain surgeon. But, to get all this, you will have to vote for me first!"

 

 

If I had to condense what's  happening with respect to interest rates I would say that the world is long central bank confidence and short common sense.

 

I have no idea what is going to happen and how it ends, but I think it could be a trip to financial market hell like in 2008 and possibly worse.

 

Going long real assets like real estate, gold, land etc. seems to be one way to escape. Even buying bitcoin seems to me a better bet than buying a 100 year bond yielding nothing. At least with bitcoin, you have a chance to make money (vs fiat currency ), while with a 10” year bond, you are almost guaranteed to be a loser.

[TwoCitiesCapital]

Negative rates in Europe have inverted the US yield curve.

 

Dan Fuss:

https://www.barrons.com/articles/why-bond-legend-dan-fuss-is-buying-at-t-stock-51563363000

 

"The flows of capital from abroad means the gulf between ultralow or negative yields elsewhere and the high U.S. yields will have to narrow, he continues. "

 

Fed chief Powell said 2 days ago:

 

https://www.cnbc.com/2019/07/16/feds-powell-says-uncertainties-have-increased-chances-of-a-rate-cut.html

 

“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade, and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decisionmaking,” he said.

 

While I don't disagree with the statement overall, I'd like to see flows information confirm it.

 

It was my understanding that this was, in part, what drove the 10-year to 1.60% back in 2016, but since then I thought it had been a net negative return for most foreign buyers to buy treasuries and hedge the currency risk which has eliminated a lot of the foreign demand over the past 2 years.

 

Is there any flow data supporting foreign buyers?

If the references I looked at are correct, US government debt held by foreign entities has increased ++ after the last recession but has relatively plateaued.

https://fred.stlouisfed.org/series/FDHBFIN

However, the US government has issued debt at a rate much higher than GDP growth and somebody/somewhere has been piling up. In percentage terms, US government debt held by foreign entities over total US government debt (as per the Treasury Department) has risen from about 25% entering the Great Recession peaked at around 34% in 2013-6 and is now on its way down to 29% even if absolute numbers keep going up. Remember also that the Fed has recently been a net seller of government debt. Against all odds, rates have gone down despite the increased supply and demand from US individuals and institutions (including banks) seems to be the driving force.

Here is official data showing what happened recently (over a year-period when public debt increased by 960B).

https://ticdata.treasury.gov/Publish/mfh.txt

From a bird's eye view it seems that the fear and greed spectrum looks more and more like the bimodal distribution that is becoming obvious in other segments which cannot be discussed in investment threads. The US continues to have the cleanest dirty shirt but it's getting dirtier in our beg-thy-neighbor world.

 

I think this supports that we cannot believe that it's foreign buyers. Foreign held treasuries have increased slightly since 2016, but at a far lesser rate than the supply which results in them owning a significant % of the total supply less than their peak in 2016 (as you pointed out).

 

If foreign buyers went from 34% ownership of the Treasury market to 29%, they certainly can't be the cause of the recent drop in rates - someone else had to absorb their 5% reduction along with the increase in new supply.

 

I would tend to believe the BofA CEO because he has the whole of Merrill Lynch at his disposal to find out what's going on (does anyone here know why the Treasuries held by "private investors" has more than doubled from $6 trillion to $14 trillion in the graph from the same website linked below?). But whether or not it is foreign buyers, let us look at the duration risk.

 

https://fredblog.stlouisfed.org/2018/04/whos-buying-treasuries/?utm_source=series_page&utm_medium=related_content&utm_term=related_resources&utm_campaign=fredblog

 

home.treasury.gov/news/press-releases/sm679

 

Press release from May 2019. Pietrangeli is the Director of the Office of Debt Management and a member of the Treausry Borrowing Advisory Committee. I'd take what he says, and the data, over what BofA says any day.

 

Pietrangeli next reviewed recent tends in foreign holdings of Treasury securities. He noted that foreign participation in auctions remains in line with historical levels and the amount of foreign holdings had remained steady or had increased gradually since 2014, even as borrowing needs have grown substantially . He concluded that domestic buyers have increasingly absorbed the larger debt issuance since 2014.

 

Once again, it's not foreign buyers driving U.S. rates

[RuleNumberOne]

Talk, talk, and more talk but no action from the ECB. They are out of bullets. They have been threatening monetary easing for several months and will continue to wave their empty gun. The easing is always going to happen at the next meeting, it has been that way for a long time now.

 

German industry in "free fall". Ifo survey lowest in 9 years

https://www.ft.com/content/08010baa-aeb6-11e9-8030-530adfa879c2

 

Eurozone manufacturing activity lowest in 7 years

https://www.ft.com/content/7b7c5140-ade2-11e9-8030-530adfa879c2

 

 

Italy debt to GDP higher than before the crisis, youth unemployment in Italy 33%.