Category: Fixed Income

Treasury, municipal and corporate bonds

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Ray Dalio Explains The Rare Set Of Circumstances That's Making Him Bearish On Markets | Business Insider

Joe Weisenthal reports on hedge fund guru Ray Dalio’s outlook:

His novel set of circumstances he sees is an economy that faces austerity (due to the Fiscal Cliff, etc.) coupled with a Fed that’s mostly blown its bazooka, and can’t get much more juice out of QE.

  • Yields can’t go down anymore.
  • Austerity is coming.
  • Economy is running out of steam.
  • QE is losing its efficacy.
  • Rate turn probably finally coming late in 2013.

Read more at Ray Dalio Explains The Rare Set Of Circumstances That's Making Him Bearish On Markets – Business Insider.

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The Most Compelling Argument for Equities | Pragmatic Capitalism

Cullen Roche quotes David Rosenberg:

The Fed has also completely altered the relationship between stocks and bonds by nurturing an environment of ever deeper negative real interest rates. Therein lies the rub. The economy and earnings are weak, and getting weaker, but the interest rate used to discount the future earnings stream keeps getting more and more negative, and that in turn raises future profit expectations.

Cullen also refers to the spread between the S&P 500 dividend yield and the 5-year Treasury Note yield which has widened to 170 basis points (1.70%). What he has not considered is the upsurge in share buybacks over the last decade as a tax efficient alternative to dividends — which means the dividend yield is understated. The spread should be even wider.

via PRAGMATIC CAPITALISM – David Rosenberg: The Most Compelling Argument for Equities.

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Treasury yields warn more of the same

Inflation has fallen over the last quarter-century, so one would expect to find Treasury yields have fallen, but there is more than just benign inflation at work. The Fed has also been suppressing long-term interest rates, with QE1, QE2, Operation Twist and now QE3.

10-year Treasury Yields

The yield on 10-year Treasuries is now below the Fed’s long-term inflation target of 2 percent, offering savers a negative return on investment unless they are prepared to take on risk. The Fed’s aim is to induce investors to take on more risk, in the hope that increased capital spending will stimulate employment and lead to a recovery. But they risk leading savers into another disaster, with falling earnings or rising yields ending in capital losses.

Corporations are reluctant to expand and will remain so until they see a sustainable increase in consumption. Fueled by new jobs — not short-term credit. Low interest rates without job growth could cause another speculative bubble, with too much money chasing too few opportunities.

Without jobs, no monetary policy is likely to succeed.

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On Investment Time Horizons – Seeking Alpha

David Merkel observes that Shiller’s CAPE10 ratio and Tobin’s Q-ratio both “indicate that stocks are not likely to return a lot over the next 10 years”.

The CAPE10 ratio is a long-term, smoothed PE-ratio first popularized by Yale Professor Robert Shiller in his book Irrational Exuberance. CAPE10 compares the current S&P 500 index value to the average of the last 10-years annual earnings. James Tobin’s Q-ratio compares current price to net worth (total company assets minus liabilities).

Merkel points out, however, that “the same is true of most high-quality bond investments …. and high-yield investments when expected losses are netted out…..I am not crazy about buying bonds here. The risk-reward is awkward, but the same is true of stocks.”

Bottom line is investors are being starved of yield by the Fed’s Twist and QE3 operations. Investors may be forced to take on additional risk in order to boost yields, but that could end in disaster, with capital losses if yields rise or earnings fall. Where possible, the safest strategy would be to tighten your belt and sit this out.

via On Investment Time Horizons – Seeking Alpha.

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Treasury yields rising — good for stocks

10-Year Treasury yields are headed for a test of resistance at 1.70 percent after recovery above the descending trendline warned of a “bear trap” — actually a bull trap because yields are the inverse of price. Follow-through above 1.60 percent has confirmed, and breakout above 1.70 would signal an advance to 2.0 percent* — a bullish sign for stocks.

10-Year Treasury Yields

* Target calculation: 1.70 + ( 1.70 – 1.40 ) = 2.00

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Treasury yields: What a difference a day makes

10-Year Treasury yields gapped above resistance at 1.45 percent and the descending trendline, signaling an outflow from Treasuries and into stocks. Breakout above 1.70 percent would suggest a primary down-trend for bonds (price is the inverse of yield) and an up-trend for stocks.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

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Falling Treasury yields: Money is flowing out of stocks

Retracement of 10-Year Treasury yields respected the new resistance level after breaking support at 1.45 percent, signaling a decline to 1.20 percent*. There has been little change in Fed holdings over the past week that could distort bond flows. Declining yields reflect investors leaving stocks for the safety of bonds and warn of a stock market correction. Recovery above 1.70 percent is most unlikely– without QE3 — but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

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Treasury yields continue to fall

10-Year Treasury yields are testing support at 1.45 percent. Breach would offer a target of 1.20 percent*. Declining yields suggest that money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

Latest stats from the Fed show holdings of Treasury notes and bonds increased by $3.9 billion over the last week, which may have contributed to the decline. Holdings of (short-term) Treasury bills fell to $14.6 billion, leaving little room for further “Twist” operations — where the Fed swaps short-term holdings for long-term Treasuries.

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Falling Treasury yields: Money is flowing out of stocks

10-Year Treasury yields broke medium-term support at 1.55 percent, indicating another decline. Breach of support at 1.45 percent would confirm, offering a target of 1.20 percent*. Latest stats from the Fed show holdings of Treasury notes and bonds fell over the last week, so the fall is not due to “Operation Twist”. Declining yields suggest that the current stock market rally is likely to fail: money is flowing out of stocks and into bonds. Recovery above 1.70 percent is unlikely but would suggest another stock market rally.

10-Year Treasury Yields

* Target calculation: 1.45 – ( 1.70 – 1.45 ) = 1.20

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