Wednesday, April 4, 2012

The Bond Market Anti-Vigilantes

Yesterday, Ben Bernanke gave the green light and the bond vigilantes ran amok. Much land was seized!

30 Year Treasury Yield: 3.35% -> 3.41%

Today, the bond anti-vigilantes stormed the castle.

30 Year Treasury Yield: 3.41% -> 3.37%

Got holocaust cloak?

One surprising difference between today's market and yesterday's is the fact that Treasury bonds are doing well today. They sold off along with everything else yesterday on disappointment that the Fed wouldn't be backing up the money truck to buy more bonds any time really soon. Today, though, they seem to be expecting that the Fed will come to their rescue eventually.

Treasury bonds doing well today are not all that surprising to bondmageddon hecklers. I bought many individual TIPS and I-Bonds over the years. I hold to maturity. I never bought bonds with the understanding that the Fed would "eventually" rescue me. And why is that? The Fed is way too busy trying to rescue everyone else!

Did the Fed rescue the bond market when the stock market bubble popped in 2000? Did the Fed rescue the bond market when the housing and stock market bubbles popped in 2007?

No. I'm fairly sure the bond market was doing just fine without the Fed's help, lol. Sigh.

Who really thinks that long-term bond investors are expecting the Fed to come to their rescue? That's got to be the craziest economic theory ever. It ranks right up there with
hurricanes boosting the economy.

As a bond investor with a bond ladder who holds bonds to maturity, do you know what would really rescue me? Higher interest rates and lower inflation! That's what. As my bonds mature I could reinvest them with a smile on my face. So when can I count on the Fed making that happen? Ever?

It is my humble opinion that this economy is in the intensive care unit and any attempts to remove it from life support are going to be a sight to behold. Oh how I wish I was wrong. I would love to see higher interest rates and a nice strong economy to support them. No joke.

This is not investment advice.


Troy said...

" I would love to see higher interest rates" says we should get back to 1990's consumer leverage around 2020.

Of course, consumer are also on the hook for the baby boom's retirement payouts, also starting in earnest around 2020.

Throwing in federal debt too

one can see that we're still kinda pegged on the leverage scale here.

And our 400%+ DTI leverage means every 100bp rate rise would kinda be a 4% bite out of incomes at this point.

Things were looking a lot better when we had that 2.5X DTI leverage 10 years ago. We shoulda stuck with that.

Stagflationary Mark said...


"I would love to see higher interest rates and a nice strong economy to support them."

I get the impression that you don't think I'll be getting my wish, lol. Sigh.

tj and the bear said...

If true, that's fantastic news. I can simply keep doing what I am doing then with little risk of being financially ruined. Inflation overall will be relatively tame.

Been out a few days, come back to find a multitude of posts and this response to my last comment. WTF??

Reminds me of the old Steve Martin riff where he talks about speculating in cardboard. Let me know when they come out with the Toilet Paper ETF.

I don't know what gives you the impression that inflation itself will remain tame. Perhaps when the land of ZIRP (Japan) blows you'll see the writing on the wall for the states. Meanwhile, we'll just watch the PIIGS all get slaughtered.

Stagflationary Mark said...

tj and the bear,

"I don't know what gives you the impression that inflation itself will remain tame."

It was in response to your comment.

"TP, OTOH, will keep soldiering on at a stable, inflation-adjusted rate due to virtually unlimited source material and a long-perfected manufacturing process."

That's certainly been the case since I turned bearish 8 years ago even as gold has exploded higher, not that I'm actually betting on it. I do prefer inflation adjusted bonds as limited insurance.

I remember a time when gold bugs would tout that gold tracked overall inflation too in a stable and predictable way, since it was an inflation hedge for thousands of years. These days it has turned into a real leveraged profit making machine though, much like real estate once did. Its 15% annual returns have been far in excess of what non-investment grade physical toilet paper has done.

Hey, just opinions. You think comparing gold to toilet paper is a canard. I do not. We'll both have many more years to see what happens.

Troy said...

No wage inflation, no inflation.

I'd been looking at a full spreadsheet of US births by year prior to seeing the above comments, musing about various demographic trends, e.g.:

1965: initial peak age 0-18 population at 76.2M
1983-86: age 0-18 valley at 66M
2005: 76M level regained
2012: 0-18 age population is 76.8M and will rise to 82M by 2030

Rise in children: inflationary or deflationary?

In 1989, age 25-35 age population peaked at 42M.
Now 25-35 age peeps have fallen to 36M but will smoothly rise to 40M by 2030.

10% rise in young workforce between now and 2030: inflationary or deflationary?

Total workforce age 18-60 was 123M (less all the deaths along the way) in 1969. Since then this has smoothly expanded to 163M as of 2012, a roughly +1M/year rate of growth.

From 2009 through 2027 the 18-60 pop will be in the 162M +/- 1M range -- we're not going to get any more labor force growth via demographics at least.

So the baby boom retirement will be helpful in getting the Millennial generation some more jobs here. But with this job comes the responsibility of paying the leaving guy's pension, well, maybe a third of it I guess.

This significant increased tax burden on workers to pay the 80M boomer pensions of 2030 is not inflationary.

Or, if you're a Republican, cutting government spending 30% to bring the budget into primary balance is not inflationary either, to understate the case.

Looking at mid-70s inflation, a lot of it hit food prices first, with of course gasoline also getting pushed up.

The 1970s food-energy inflation hit the housing sector last, since inflation in necessities cut the household surplus available to bid up rents and mortgage payments.

We should see significant food-energy inflation again this decade and next. However, this time around housing is immensely more inflated than it was ca 1975. It's my thesis that if household budgets come under continued pressure this decade and next, housing can and will disgorge more gains to make up the difference.

We basically need to double taxes around here or cut spending in half. Neither of these are inflationary!

The 1970s and 80s featured an immense bolus of youth bumrushing the workforce, finding jobs, getting credit, starting families, seeing pretty decent productivity gains thanks to various technologies, etc. Even though there was pretty serious price shocks thanks to OPEC deciding to set their own prices, the 1980s and 90s oil glut gave us a breather from that (I just read last night that California oil production actually peaked in 1985, and Alaska was peaking around then too).

In the 1990s we made the curious decision to offshore our manufacturing to Mexico and China, regardless of the trade deficits that would result. The rise of the internet facilitated manufacturing globalization and the general globalization of all jobs.

This is a new reality that has not been inflationary quite yet -- imports are deflationary (!), but if and when we have to start paying back the $5T we owe the world then it could prove to be inflationary to food and any other commodities we ship to satisfy our creditors' demands.

Troy said...

As for gold,

"The other side of the coin is that rising costs have not prevented producers from posting record margins. In the first quarter [2011], margins rose from $758/ounce to $767/ounce. In the fourth quarter of 2008, margins stood at $422/ounce."

This is what I meant by gold front-running inflation. Production costs could double from here and miners would still make a profit.

The main demand for gold production is just goldbugs trying to hide from the inflation boogeyman.

Now, I can't see the future and it is entirely possible the USD will get into a competitive devaluation battle with the Euro, yen, yuan, etc. In that case global printing will take oil and gold to the moon.

But absent that future, I don't see any great nominal price pushers coming to our economy. Just a lot of taxes that are going to have to be paid, and the 60+ crowd doubling their economic footprint compared to 2000.

Stagflationary Mark said...


Speaking of gold and taxes, I have to tell you that this brought me absolutely no comfort when I owned gold.

What Governor Gregoire said — and did

Candidate Gregoire vowed to take a "hard-nosed look" at the more than 430 tax exemptions on the state's books. She cited the tax break on gold bullion as one that could possibly be eliminated.

That's not what you want to be reading right after you buy gold.

Guess which state I live in? The same state she does.

Gold is already taxed as a collectible (28%). There's nothing to stop the government from raising the taxes even higher should they so desire.