4th Time a Charm for the Long Bond?

Mish

For the 4th time the long bond yield dropped below 2.0%. Will this one last?

Treasury Curve Details

  1. There is now a solid wall of inversions. Every Treasury Note and bill from three-year down is inverted with the next lower duration except for the Fed Funds Rate.
  2. The 10-year yield is inverted with 6-month and shorter durations.
  3. The 30-year long bond dipped below 2.0% for the fourth time and is just 6 basis points from a record low.

The same thing happened on January 31.

At that time I discussed My Conversation With the 30-Year Long Bond.

My Conversation With Mr. Bond

Hello Mr. Bond. You just cannot seem to stay away from 2.0%.

We missed you. Welcome back. Will this be a longer visit? Are you calling for a recession?

Unfortunately, Mr. Bond did not answer. He just winked.

Today, I asked Mr. Bond the same questions.

Once again, he did not answer directly.

Instead, he just shrugged his shoulders and responded with three questions of his own:

  1. Did you notice Half the Population of China, 760 Million, Now Locked Down?
  2. Is Japan Headed for Recession, or In Recession?
  3. Do you really believe the US can avoid a recession?

With that, Mr. Bond said: I have to run, but here's another question for you to think about: If not now, when?

On his way out the door I thought I heard him singing Do It To Me One More Time by Captain and Tennille, but it might have been Tonight's the Night.

Mike "Mish" Shedlock

Comments (25)
Sechel
Sechel

Hard to see why we everyone is so bullish on equities and corporate earnings when the bond yield is at 2% Either bonds are right or stocks are right, both cannot be.

8 Replies

Scooot
Scooot

REPLY To MISH

Bonds usually benefit in recessionary times because prices fall.

Apple's earnings are going to take a hit, perhaps temporarily, but iPhone prices won't fall. They might rise because of part shortages etc. As might the prices of other goods.

I keep reading the underlying inflation rate is higher than the reported numbers. The consequences of this virus seem to be adding to inflationary pressures.

On the other hand, if the Fed keeps buying bonds with printed money, yields will stay low.

I don't know, I'd guess in the near term bonds will be well bid.

Sechel
Sechel

I go with bonds here over stocks despite the fact that a 2% means a negative real return. I still know I get my nominal principal back and the duration of stocks is like 40 years. If rates go up both stocks and bonds get hit. I think stocks more.

Tony Bennett
Tony Bennett

Don't forget capital gain.

That is where the action has been / will be.

Carl_R
Carl_R

Historically the PE has been 1/(interest rate+inflation). With the long bond at 2% and inflation at 2%, you expect a PE of ~25, which is very high historically. Falling interest rates is the same thing as rising bond prices, and correlates to rising stock prices. Thus, it is often true that bond prices and stock prices move together, which they are doing at the moment.

Note, however, that if interest rates are low because the economy is faltering, stocks may fall as bonds rise. People diversify their portfolios by owning some stocks and some bonds, because there are times when they move in opposite directions, and those can be times when the market is most at risk.

Sechel
Sechel

I don't feel I'm diversifying so much as reducing volatility since the payment stream is more certain. Feels like risk assets are more highly correlated today more than ever. For a while I found the correlation between the s&p 500 and the Yen vs Ausie dollar almost a perfect correlation

AWC
AWC

Au contraire, in “Markets” that have lost all fundamental reason, both bonds and stawks can be wrong. ie: when stawks slip on a banana peel, who will catch the fallen angels on the “ Security” side?

Sechel
Sechel

i feel like the bond market is more rational than the stock market. i follow and am involved in both but there's less emotion in bonds. its basically duration, risk , recovery value etc. You're generally not falling in love with a company or making crazy assumptions about a firms growth

Stuki
Stuki

Firms' growth has precious little to do with neither stocks nor bonds any more. It's a cute and quaint illusion to cling to, though, for those who still et warm and fuzzy feelings from bedtime stories.

Instead, you are making a bet on which nominal class of paper is most likely to be bailed out. And which class will; when the time comes that no amount of shaking down the productive classes; who own little, and less every day, of either; can keep both afloat simultaneously; be thrown under the bus to prop up the other one.

Bonds are ultimately the government, so you'd think it would be a safe bet they would prevail. But stocks are those who bought the government with loot handed to them by government theft from others..... So, who will prevail? It's a bit like Europe a hundred years ago: On one side communists, on the other fascists. Differing, if at all, only nominally. Economically, it is ultimately entirely irrelevant. Like all exercises in Newspeakian obfuscation.

No. 1-10
KidHorn
KidHorn

Seems the market is expecting QE to be a permanent part of our monetary policy. Not just in the US. All the major central banks.

Realist
Realist

I don’t worry much about these things because I always have a balanced and well diversified portfolio. I get the impression that many people here try to “time the market” or “bet big on one or two things like gold and cash”. Then I see these people hoping or wishing for a market crash or recession in order to justify their investment position.

The majority of my investments are in “productive” assets. In other words, assets that produce goods, services, and jobs.

Though I have a small position in gold, I consider it mostly a waste of resources. Same goes for “collectibles” like art, baseball cards, beanie babies, etc.

Kid horn: I do expect QE forever, low and lower interest rates, skyrocketing deficits etc because that is what “the powers that be” will keep doing. Not because they should. But simply because they will. That’s reality.

Tony Bennett
Tony Bennett

Long Bond = Old Man River

Going to go where it wants (yield < 1%) in due time.

121263
121263

The way this old bond trader who started trading bonds on Wall St in 1981 and still trades for himself sees it new all time low yields. You have supply chains shredding with nonlinear second and third order
effects. You have Japan in recession,Germany and who knows China.
Latin America a disaster. Corona virus spreading ,believe the scientists, Weak retail sales, over leveraged corporations
collapsing shipping and intermodal volumes manufacturing in recession. What’s not to like?

121263
121263

The old bond trader forgot one other very important point. Credit demand has been to keep zombie Corp alive. No real capex demand.
Fed can push on a string all it wants but it won’t help demand much.

abend237-04
abend237-04

I'm beginning to think I may understand why Guy Clark didn't like his landlord:

Could be, he was Mr. Bond.

AWC
AWC

FF- 30 yr,,,,reward free risk premium at 39 BP’s? Better to buy toilet paper forward, or even pre 65 quarters.

Especially considering the only way out for the Fed now is fiscal. Major fiscal. Tsunami fiscal. MMT fiscal. Like, Bernank chopper fiscal. War fiscal.

William Janes
William Janes

This blog never fails to accouter to Apocalyptic forecasts. Reminds of when that Hedgeye Blog flogged the stock, KMI, and said to get out before the company went bankrupt. Didn't happen.


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