I’m calling a top in bonds in the 10-year and higher maturities.
In too soon, of course, but I did buy some inverse T-bond ETFs today. Not convinced at all that the rates will start climbing from here (my commitment almost guarantees they keep the bullish trend a bit longer).
Still, I bought some TBT and a bit of TMV today. I wrote September 32 calls against the TBT, which proceeded down soon after I bought.
PS after the break
In response to those who wondered at my thinking, here it is in a nutshell:
I don’t see us entering a Japanese-style low-rate decade because we started with far less household savings than they did, and because our currency already has all the potential benefits of being a world reserve currency working in its favor.
It can only weaken from here vs. other world currencies, at least due to those two major enhancers.
When you bought JGB’s for 2%, you were competing with Japanese savers, and you were also getting your principal back in a fundamentally very strong currency. If you look back over the last 15 years or so and pick a 10-year window to buy JGB’s, chances are you participated in the long term secular bull market in Yen/Dollar exchange. Certainly anyone who bought 110 or 120 yen with a Dollar to lock up in 2% bonds has to be pleased that it only costs them 85 or so Yen to buy those dollars today.
The sovereign debt liquidity crisis in Europe will now fade as our own subprime liquidity crisis did, under a flood of pumped-in liquidity and government-backed credit. That’s not to say the finances of Greece, Spain or Ireland will be better next year, any more than the plight of subprime borrowers has been fixed in just these past two years over here.
But the super steep discounting will stop.
In late 2008/early 2009, top-rated private label prime MBS traded all the way down to prices in the teens, prices at which every house in the pools could have been foreclosed with 35 cent on the dollar recovery and still give buyers returns of 20% or higher.
That was because all the repo financing dried up, so people had to get “equity” returns on bonds, even after assuming the worst for those bonds.
It’s pretty clear to me that every central banker and every major economy’s political leaders will hold their noses and keep the wheels from falling off the wagon. We seem to forget that in the post-Lehman days, all the major nations’ leaders chose to provide government guarantees for what was private bank obligations. And they weren’t all or even mostly liberals or one-world internationalists…. it was a hard-core free marketeer in the White House, an old-style German conservative as Chancellor, a Labor Prime Minister in London, a Gallic nationalist in France… in other words, every political stripe and philosophy. Faced with the reality of 20% yields required on the very best bonds under the very worst assumptions, they knew to let it run its course was to set the world on a path to a 75% decline in GDP.
The Depression of the 1930’s would have been mild in comparison to the potential for what could have been happening right now. For one thing, there were a lot fewer people on the planet back then. For another, half or more of the people alive at that time were within walking distance of food that could be grown and sustain them, without the use of fertilizers or other things that only come if an international trade and finance supply chain is up and working.
So, given the choice between selling out free market principles (which are actually not such hard and fast principles, anyway) and watching half their people face starvation, philosophy lost. And it will again, should it come to a choice like that again.
Unless we see another large change in our basic economy from enormously cheap energy, I think the deflationary forces will remain in check, even while the debt overhang gets resolved at the household, municipality and sovereign levels.
We might even get smart enough to implement policies that bring about wage inflation.
But that will be for another post another time.