Author Topic: 10 Year Bond Yields  (Read 8771 times)

petec

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Re: 10 Year Bond Yields
« Reply #20 on: February 01, 2018, 04:13:01 AM »

  I think a lot of people assumed the impact of quantitative easing would be inflation. Well it was. But inflation in financial assets rather than real assets. Presumably there will come a point where wealth effects drive consumption

Or a point where markets fall and people realise they were only wealthy on paper ;)

Strikes me the best case outlook from here is for tight employment markets, rising wages, rising demand (because finally money goes to those with a high propensity to consume), and thus rising capital investment. That could lead to higher real GDP growth (and might or might not lead to inflation depending on credit creation). But it strikes me it could also lead to lower corporate margins.

Or the whole thing could crash tomorrow ;)


Cigarbutt

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Re: 10 Year Bond Yields
« Reply #21 on: February 01, 2018, 06:40:57 AM »
Interesting topic.
So many variables, including sentiment.
Not clear though how this can "impact" investment decisions/outcomes.
Maybe should spend the time reviewing DaVita instead.
The theme is to assess the possibility of "restructuring" and how to position to have protection or to benefit.

Trying to connect some dots after reading an interesting report that is relevant to the US government 10 year bond yield.
http://en.dagongcredit.com/index.php?m=content&c=index&a=show&catid=88&id=4937

The complete report (bottom of page) has some nice graphs. I understand that the analysis may be biased but isn't it interesting to learn about competitors' assessment?
Especially if they are major owners of the very paper (electronic entry) they are holding?

So, can the US government default?
The answer is very likely no in the classic sense given the ability to "print" its own currency and given our present risk-free environment.
But the default definition can be elastic.

Interestingly, in January 2009, Mr. Market (the credit default swap spread market) assigned a probability of US government default at 6% (!) over the next 10 years. (Amazed by this phenomenon as one had to rely on a counter-party  ???)
Since then, I understand that the measure has remained below 1%, and often a small fraction of 1%.

end 2008:     total public debt/GDP=73,5%
Q3  2017:     total public debt/GDP=103,8%

The US has never failed to repay its debt. But there were two episodes where the elastic definition applied. First in 1790 (interest deferral in a venture capital spirit) and in 1933 with the gold devaluation that petec referred to.

At this point with the economy firing on all cylinders, the public deficit stands at about 3,5% of GDP (growing trend) and private savings rate (December 2017) is at 2,4% (low point and declining).

More questions than answers at this point.

In 2018,
-What is the standard of value?
-What is the (real) price of debt?
-If you represent the standard of value and you need somehow to devalue, how can you devalue without "partners" doing the same?

One can hope that the underlying economy can reach its full potential.

Interesting times for the 10 Year Bond.


Viking

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Re: 10 Year Bond Yields
« Reply #22 on: February 01, 2018, 01:10:02 PM »
Bond yields spike and stocks... do nothing. WOW. Volatility looks like it is coming back.

                      Sept 27 2016.     Jan 1 2018.    Jan 31 2018.    Feb 1 2018
US 2 Year.         0.75                      1.92.           2.14.                 2.16
US 10 Year.       1.56                      2.46            2.72.                 2.78
US 30 Year       2.28.                      2.81.           2.95.                 3.01

Gundlach said 3% was the critical level for the 30 year; he said once the 30 year passed 3% you can officially put a pitchfork in the bond bull market and call its end. We will see how fast yields continue ie to move higher. Currently the experts are calling for the 10 year to hit 3% by the end of the year... looks to me like 3% will be taken out by the end of March.

JayGatsby

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Re: 10 Year Bond Yields
« Reply #23 on: February 01, 2018, 02:57:19 PM »
But what is going to drive rates higher?  The only thing that drives rates higher for longer is inflation. 
Packer

This may have been an easy statement to make when main players in the treasury market are private entities, banks and insurance companies, foreign or domestic.  Today, half of the treasury market is owned by foreign central banks and Federal Reserve, whose motivations are driven by as much politics as economics.  This statement becomes more questionable.  Over the long term, it certainly remains true.  But that long term can be much longer than most people's investment horizon.
Even putting politics aside, it seems like it's still supply/demand. As supply of t-bills goes up there has to be equal demand for rates to stay the same. Otherwise rates have to increase to stimulate demand. Foreign governments have a choice of investing in the US (via t-bills) or investing in their own countries.

Like with companies, being dependent on outside financing seems risky because you're tied to the whims of those investors. T-bills are a complicated market though, that I'm far from an expert in. We'll see.

Spekulatius

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Re: 10 Year Bond Yields
« Reply #24 on: February 01, 2018, 03:07:23 PM »
Higher LT interest rates, unless they are offset by higher growth rates, should put pressure on the valuation of a lot of asset classes, most importantly residential and commercial real estate. I know many like banks as a ply on higher interest rates and while it is true that they would benefit from higher NIM, the region banks loan portfolio are chuck full with  commercial RE loans. Now add disruption in retail to this equation and I can see some real potential for nasty writeoffs for non performing loans in this sector.

Reits are potentially going to be hit by a double whammy of lower asset valuation no higher financing costs, maybe even a triple whammy when they are in retail RE.
To be a realist, one has to believe in miracles.

rb

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Re: 10 Year Bond Yields
« Reply #25 on: February 01, 2018, 03:25:45 PM »
Even putting politics aside, it seems like it's still supply/demand. As supply of t-bills goes up there has to be equal demand for rates to stay the same. Otherwise rates have to increase to stimulate demand. Foreign governments have a choice of investing in the US (via t-bills) or investing in their own countries.

Like with companies, being dependent on outside financing seems risky because you're tied to the whims of those investors. T-bills are a complicated market though, that I'm far from an expert in. We'll see.
That is not really correct.

JayGatsby

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Re: 10 Year Bond Yields
« Reply #26 on: February 01, 2018, 04:03:01 PM »
Even putting politics aside, it seems like it's still supply/demand. As supply of t-bills goes up there has to be equal demand for rates to stay the same. Otherwise rates have to increase to stimulate demand. Foreign governments have a choice of investing in the US (via t-bills) or investing in their own countries.

Like with companies, being dependent on outside financing seems risky because you're tied to the whims of those investors. T-bills are a complicated market though, that I'm far from an expert in. We'll see.
That is not really correct.
Why not?

rb

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Re: 10 Year Bond Yields
« Reply #27 on: February 01, 2018, 04:19:15 PM »
Even putting politics aside, it seems like it's still supply/demand. As supply of t-bills goes up there has to be equal demand for rates to stay the same. Otherwise rates have to increase to stimulate demand. Foreign governments have a choice of investing in the US (via t-bills) or investing in their own countries.

Like with companies, being dependent on outside financing seems risky because you're tied to the whims of those investors. T-bills are a complicated market though, that I'm far from an expert in. We'll see.
That is not really correct.
Why not?
For a whole host of reasons capital flows are a reverse of trade flows. Country A has T bills because it ran a trade surplus with the US the you had reverse capital flow. That money went back to the US and bought T-bills. Country A can trade their T-bills to country B with which they run a trade deficit. But then country B has to hold the T-bills. Either way someone will hold those T-bills. But country A cannot choose to use the trade surplus to invest in their own country. That surplus MUST be invested back in the US one way or another.

What can be different is the type of investment country A makes into the US. They don't need to hold T-bills. They can do FDI (like building factories in the US), they can put it in stocks, property, etc. They just choose to have a lot of bonds: T-bills and mortgage bonds.

JayGatsby

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Re: 10 Year Bond Yields
« Reply #28 on: February 01, 2018, 04:40:01 PM »
For a whole host of reasons capital flows are a reverse of trade flows. Country A has T bills because it ran a trade surplus with the US the you had reverse capital flow. That money went back to the US and bought T-bills. Country A can trade their T-bills to country B with which they run a trade deficit. But then country B has to hold the T-bills. Either way someone will hold those T-bills. But country A cannot choose to use the trade surplus to invest in their own country. That surplus MUST be invested back in the US one way or another.

What can be different is the type of investment country A makes into the US. They don't need to hold T-bills. They can do FDI (like building factories in the US), they can put it in stocks, property, etc. They just choose to have a lot of bonds: T-bills and mortgage bonds.
Agree with all that. Two things though:
1. The US budget deficit (~$1T) is bigger than the trade deficit (~$500B). So doesn't that create a need for true outside investment in t-bills?
2. Country B still has the option of holding onto those T-bills or selling them. So if Country B has been in the market selling their peddling $500B of T-bills and now all of a sudden the treasury is also selling $500B of t-bills (math may be wrong.. not sure how much the deficit increased) because US taxpayers are no longer funding that $500B, all else equal shouldn't that increase in supply result in a decrease in price (increase in yield)?

Japan seems to be the classic example of a country that has debt financed itself for a long time. The difference I've heard (haven't confirmed statistics on this) is that the buyers of Japanese debt are largely Japanese citizens. Not sure what the long-term implications of that are if the population declines and becomes net sellers, but at least for the last 20 to 30 years it's worked.

Interesting stuff. I've never understood all of the fund flows with this money printing as well as I'd like. I've been one of the people saying inflation would go crazy since 2010.

rb

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Re: 10 Year Bond Yields
« Reply #29 on: February 01, 2018, 06:09:28 PM »
The idea here is that your foreign creditors do not have a choice in selling your bonds or not lend you money. In the past it you may have heard things like "oh what if china decides to not led the US money anymore". Basically China doesn't have a choice. They NEED to hold US bonds because they've ran trade surpluses with the US.

It's the same thing with Japan. Japan didn't finance their debt domestically by accident. Japan HAD to finance their debt domestically because for the most part they were running trade surpluses. This wasn't a problem for them because the Japanese have high savings and generally low propensities to consume.

In the US the numbers are large. But I don't think they'll have problems financing the deficit domestically. The situation is different from Japan. Americans have a high propensity to consume. But the deficits mainly come from tax policies that favor the rich which have low marginal propensities to consume. So you can picture it like this: the federal government gives a $100 tax cut to some guy who doesn't need anything. The government deficit goes up by $100. Then the guy uses his extra $100 to buy a government bond and that finances the deficit. So there won't really be a problem to finance the deficit domestically.

The real problem comes when deficit financing has to compete with consumption and investment that's when yields have to spike. But then the government can also raise taxes which lowers the deficit. Those can also lower consumption and eliminate the competition. Look at it this way, you will be hard pressed to find a government debt crisis in a country with a functioning economy that borrows in its own currency.