I have been watching the 10 and 30 Year Treasury Bonds the last 10 months or so. We had an implosion of bond yields starting late last year that drilled yields lower for obvious reasons. As bond prices exploded higher the party had to end, and it did in March 2009. Many people will make many assumptions to why the sudden secular change in both the equity and bond markets, but my theory is just that there has to be a bubble market somewhere, and from late 2008 to early 2009, the US Treasury was the bubble market.
Just like Tech/Telco/Internet were bubbles that popped in the 90's, Housing & Credit were similar bubbles in the 21st Century. When bubbles pop, money needs to keep flowing, and these funds which were considered smart/dumb money becomes scared money, and looks for a new home. Considering that every asset class was considered toxic last year, that left USD and US Treasuries the only choice for the scared money. Well scared money became hot money after a while and we saw huge flows into Treasuries.
This was exactly what global risk managers wanted, but not what central bankers wanted. Central Bankers wanted a functioning credit system, a healthy Libor Market and a relaxed lending environment. So the printing began, QE after QE, and trillions of loss subsidisation's later those markets were stabilized in the short term. But printing money has its drawbacks, runaway inflation, exploding deficits, and nasty current account situations make owning Treasuries problematic. So what we have seen is an unwinding of the safety trade, or popping of the bubble trade back into risk assets, exactly what governments wanted.
But again, be careful what you wish for. Higher treasury yields are no good, it shifts borrowing costs into a higher gear that chokes off economic growth. I spoke in my last post about the delicate balancing act that government's around the world are engaging in. This is really a cat and mouse game between governments and their unlimited checkbooks and bond market vigilantes. On the surface you may say government wins, and so far they have, but lots of money has also been made by the bond market bears, who have been short treasuries since late March. But this is more about who is right, its really about achieving a fine asset balance within a risk environment.
So what happens? I firmly believe that overheated equities will soon quickly reverse course and head back down sharply, at the same time commodities will drop as badly as equities do. The Baltic Dry Index a standard proxy for international shipping rates is now off some 40% from recent highs, as well as the Shanghai Stock Index is below 3,000. China led the recovery and it will also lead the down draft. US Treasuries will rally viciously, The USD will rally as well, but not as much. The Aussie, British Pound, and Euro will get smoked, as the Yen rallies way above 100 vs the USD. The bond market bears are going to have to cover their shorts soon, bonds look like they have stopped going down, and the USD looks to bottom here. I have noticed over the years, when Treasury Yields top out, that usually signals a top in equities. Lower yields signal weaker economic output and an aversion to risk which is negative for equities. Yields have stabilized while equities keep ripping up, that has to change and change it will.
So in the end it doesn't matter who wins, just what side you are on when disaster hits.
No comments:
Post a Comment