The Treasury double short fund TBT has had a great run since New Year’s, when the long bond yielded just 2.5%, the lowest level since the WW2 era. I suspect that a lot of readers were with me on my bond short back then, as most bearish-minded folk had been chomping at the bit to short Treasuries (or had already been short while they ran up from summer 2008).
Now I think it’s time to think about buying this horribly overvalued security again simply because it is so universally hated.
They can’t afford to have rates keep rising this much.
The fed could stampede investors out of stocks and back into treasuries.
That’s probably what I would do in their hopeless situation.
Getting people out of stocks would be as simple as being honest about the economy, or no longer using the credit of the US to prop up insolvent companies.
That would be doubly effective because the bailouts are one of the things that make treasuries so unattractive.
They can’t do anything but jawbone. Anything they try will just have a very short-term effect on market prices. Just look at what has happened since they announced they were going to start buying Treasuries.
30-year Treasuries would be junk as buy and hold instruments even if there had been no bailouts at all. The US is broke primarily because of entitlements and secondarily because we have 130 military bases abroad and two bloody occupations in Asia.
I don’t understand why treasuries are plunging now. Why didn’t this happen weeks ago? Seems like a weird delayed response to the stock rally.
Treasuries fell hard in April as stocks really took off, but each market does its own thing. Sometimes there are tight linkages, sometimes not.
I’ll ask this because of curiosity:
Are Japanese government bonds and German government bonds horribly overvalued too? I do not think Treasuries are “horribly” overvalued; I would think a ~ 3.7% nominal yield is a very high real interest rate in this environment where the return on other assets are very low.
I have the general sentiment that Bernanke just ran out cards to play. It is probably that he would print again (but unlike most market participants, I do not think it is a 100% chance that he will raise the pot in this game of chicken), but I don’t know if he’ll test the bond market again. Perhaps, he realizes printing money has dangerous effects in a globalized economy especially if you rely on foreign funding for a large fraction of deficit financing. Bernanke would have more freedom to print if the US was more autarkic. At least Bernanke’s created the perception that he would print more. Perhaps that perception would backfire as it fuels reflation trades in commodities that increase prices for consumers who are already suffering from wage deflation and unemployment.
This is a good entry:
http://zerohedge.blogspot.com/2009/05/playing-mortgage-chicken.html
What about gold? Although I am a deflationist, I do agree with Adam of Gold versus Paper and Mish that it would do well. I do not buy the hyperinflationist’s argument that gold will hit $5,000, but it will still do well. I regard gold as an illiquid form of money that has a built in put option that increases in value due to when currencies are perceived to be in crisis. Also, since gold outlasts everything (except proton decay), I suppose it would benefit in an environment where people have negative long-term intratemporal discount rates (as this happens in older populations). It would do well when the short term interest rate is at zero, and when the return on equities will be very low.
Bernanke does whatever the big banks want — if they need money, he’ll print it up. He’s a completely compromised individual.
Treasuries are unlikely to return a real yield of 4.6% over the next 30 years, because the US government’s finances are such a wreck that very high inflation is likely by then. Given the current market environment and greater fool theory, they are a buy, which is why I’m long.
I also own gold for the long run and intend to keep buying it, though I am not averse to shorting it in the short run, just as I am not averse to trading T-bonds.