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It's been a year since I participated in the first 30-year TIPS auction. So far the trend in yields is down (i.e. bond prices are up). As they say, the trends are our friends.
My thinking is and has been that the poor real yields in I-Bonds and short-term TIPS will keep downward pressure on the long-term TIPS. Think of it like a disease. It's just a theory of course. It does not mean I'll ultimately be right thinking this way. It is how I am positioned long-term though.
February 28, 2011
China's Treasury Holdings Rose to Record $1.175 Trillion, U.S. Data Shows
China’s Treasury holdings underscore the government’s confidence in President Barack Obama’s stewardship of the U.S. economy.
Hahaha! Nearly my entire nest egg is in U.S. Treasuries. How confident do you think I am in the U.S. economy?
The truth of the matter is that every dollar we ship overseas in exchange for hard goods has to go somewhere. It isn't just going to be tucked away inside a secret box and buried within an ancient mausoleum.
Chinese officials had been saying they wanted to seek investments outside the U.S.
Talk is cheap.
Let's say everyone wished to dump Treasuries.
You sell your Treasuries in exchange for dollars. You now have dollars to spend. You use them to buy gold, silver, oil, real estate, and stocks from someone else. Now they have your dollars. What are they going to want to do with them? They just sold their gold, silver, oil, real estate, and stocks to you. Clearly they don't want those for some reason. So there they sit. They can either bury the money they have or they can try to earn at least some interest off of it. Which seems more likely?
As long as we have a large trade deficit, then we will have money flowing into our Treasuries. However, our trade deficit is not sustainable long-term. Eventually things must come back into balance. I therefore cannot predict what future interest rates will be. I can say this though. I'm fine holding inflation protected treasuries until maturity. Although hindsight may show that I was a fool to do this, at least it will show that I did not require a greater fool.
Source Data:
FRB: Selected Interest Rates
Treasury Direct: I-Bond Rates & Terms
15 comments:
Stag,
http://realestate.yahoo.com/promo/what-kind-of-a-house-can-you-get-for-under-145000.html
I find it interesting that most of these "bargains" can't be afforded with the U.S. median family income of $50K/yr and the 2.5X income rule of thumb.
Financial innovation is a euphemism for financial fraud.
Although hindsight may show that I was a fool to do this, at least it will show that I did not require a greater fool.
This, I like. Yours?
mab, I thought the rule of thumb was 3.0X. I also think, bubble years notwithstanding, it's been rounded up to 3.5, maybe even 4.0X. Perhaps equal parts low rates, dual-income families, and scarcity from an ever expanding population.
AllanF,
First, how are you? Hope all is well.
You might be right about 3x income. I was just relating my personal experience from when I bought my first and only house in 1994.
I do vividly recall the mortgage broker being amazed that I had zero debt. I didn't make much of her amazement until many years later.
Believe it or not, I used an ARM with a 5 year lock. It turned out ot be a sweet deal. The rates fell and fell and fell. The current rate is a smidge under 3%. SO much for inflation and Shadowstats.
If I could do it all over I would have used a 15 year mortgage though - it would have been paid off by now.
Oh well, it's live and learn unless you're one of the privileged bailout recipients on Wall Street. For banksters, others are forced to perpetually pay for your foolishness, fraud and mistakes.
What a system.
AllanF & mab,
This, I like. Yours?
Yeah, I'm fairly sure it is mine. I've used a variant of it a few times in the past. :)
September 23, 2009
Gold Bubble?
I have hoarded a great many items at reasonable prices. While possible that hindsight will show I was a fool to do so, it is very unlikely history will show that I was the greater fool.
In other news, I bought at about 2.5x our annual income. I put 20% down though. That means the part we financed was about 2x our annual income. I wouldn't have wanted to go much higher.
The amusing/sad part is that it was easier for me to make the payments once I was down to just the one income (divorce).
Perhaps the needs of the house did not outweigh the needs of the one? It sounds like something Spock might say. I'm such a nerd. ;)
mab,
SO much for inflation and Shadowstats.
Shadowstats has the nerve to say that consumer prices have risen roughly 8% year over year. I opted to honor them with my latest post.
I opted to honor them with my latest post.
Stag,
Honor indeed. Speaking of honor, Jamie dimon wants some RESPECT!
http://www.reuters.com/article/2011/02/04/us-jpmorgan-dimon-idUSTRE7133EE20110204
The "Last Man Standing" is one the biggest welfare queens in history. I say we pick a foreclosure victim and put them in a room with Jamie and turn out the lights. We'll see who is the last man standing.
Two men enter, one man leaves!
mab,
The link you offered is enough to make me want to vomit.
Two men enter, one man heaves.
Stag,
This book was on all the "right" coffee tables in America.
http://www.amazon.com/gp/product/B003STCKN0/ref=pd_lpo_k2_dp_sr_1?pf_rd_p=486539851&pf_rd_s=lpo-top-stripe-1&pf_rd_t=201&pf_rd_i=1416599533&pf_rd_m=ATVPDKIKX0DER&pf_rd_r=06Q31ZCTADTDNP26NC67
Of course, so was this one:
http://www.amazon.com/Maestro-Greenspans-Fed-American-Boom/dp/0743205626/ref=sr_1_2?s=books&ie=UTF8&qid=1299037858&sr=1-2
You can't make this stuff up! *sigh*
mab,
This book was on all the "right" coffee tables in America.
Leverage it!
mab, I'm fine thank you. Been on the busy side so not commenting as regularly as used to. When I get a lull I usually post a whole bunch of comments here and elsewhere, then things pick-up and I don't have anything to say for a while. I still read everyday, but it takes considerably longer for me to think about something and write a response.
As for 5-1 ARM. Yeah, I got one too. In Nov it adjusted to 3.00%, which is nice. It started out at 5%, and last year was 3.25%. When everybody was refi-ing like crazy, I kept thinking, that's the last war. The Fed has locked down short rates. Also for the first 5 years I was paying down principle at a good clip. Now when it adjusts they re-amortize the remaining principle over the entire remaining 20-sum years. My minimum required payment is $260/month. Taxes, which I pay myself are $1300/yr, probably $1400 this year. It's a small place. The condo community had 3 units of new construction added in the back lot back in '08. Due to new construction not being grandfathered on property tax increases, my mortgage is actually less than what the new units pay in property taxes alone. It's gonna suck when I eventually have to move. I've been toying with the idea of boarding school. Might be cheaper. :-)
If I could do it all over I would have used a 15 year mortgage though - it would have been paid off by now.
When I bought a house, I worked backwards. I bought a house that I could afford to pay off by age 55. When I refinanced, I decided to shorter the term even more. The person at the title company was puzzled as to why anyone would do such a thing. That's when I knew there was something screwy in the housing market (and personal economies in general).
Come on guys, there's nothing stopping one from pre-paying an mortgage. The term in the mortgage contract is the maximum term the bank is giving you. You are free to prepay as much as and as often as you like.
If you want a 12.4 year mortgage, bust out the spreadsheet and run the numbers.
With the curve as flat as it is, I prefer the longer term I think it's only a .25 nick in the rate from 180 to 360 months and you have the option of paying a lower payment if something bad were to happen.
Also I actually maintain a spreadsheet that shows the default amortization along with my personal amortization based on all the extra principle payments I've made. I keep a cumulative total of the interest charges as well. It's a nice little spreadsheet. No graphs though. I should put a graph on it. People love pictures.
Let's say everyone wished to dump Treasuries.
Stag,
This has been bugging me for years.
China and Japan have painted themselves into a corner. There's no practical way they can quickly cash out their Treasury hoards without taking losses.
I'm not sure China and Japan want to cash out as Treasuries function as money imo. QE1 and QE 2 certainly provided them both with an opportunity to sell. That said, if inflation does heat up (not my forecast), it could get interesting.
Come on guys, there's nothing stopping one from pre-paying an mortgage.
AllanF,
You're right. But for me, a 15 year mortgage would have forced the issue.
On numerous occasions over the past few years I've been tempted to pay it off. With rates so low, it's almost as if Bernanke is begging me not to. At this point, the interest payment is a very small part of my yearly nut. Property taxes are crazy high in NJ :-(
You guys are sure taking me down memory lane today. If memory serves...
In 1997, I bought a house. I used a 30-year fixed mortgage.
In 1998, I did a no-cost-to-me refinance to a new 30-year fixed mortgage. They paid everything. I got a better interest rate. What's the harm?
In 1999, I shafted their generosity. I paid off the house. I received a windfall roughly the size of my mortgage. Windfall gone. Mortgage gone.
In 2000, my tax preparer told me that I shouldn't have done that. I'd have been much better off using the money to buy stocks. As Charles Kiting said, "That's when I knew there was something screwy..." Perhaps that was what prompted me to make my first I-Bond purchase in April of 2000?
In 2002, my tax preparer told me that people would have been better off paying off their mortgage than buying stocks. She apparently did not remember what she had told me in 2000. I didn't call her on it though. She strikes me as an ethical person and I know she meant well.
And lastly, if there was a way I could prepay my property taxes for the next 30 years then I would definitely "hoard" that too. Sigh.
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