The Euro Zone’s pain is the U.S. Treasury’s gain.
The yield in for the 10-year U.S. Treasury note is down below 3.5% again thanks to bond buyer’s flight to safety in the euro debt crisis. The drop takes the yield back to where it was in December 2009.
Ordinarily, the United States would be looking at rising interest rates as its economy crawled off a bottom and bond buyers began to anticipate interest rate increases from the Federal Reserve as it took its extra low recession fighting interest rates up toward neutral. Some bond investors would even start to avoid the category completely because of fears that an economic recovery would usher in worries about inflation and higher interest rates from the Fed to head off that possibility.
That’s exactly what was happening in the early part of the year.
But that’s not what’s happening now.
Economists and big bond investors who were looking for the Federal Reserve to begin raising interest rates at the end of 2010 are pushing out their predictions into 2011.
This all produces the kind of virtuous cycle that can drive interests even lower from here.
Bond investors who were avoiding U.S. Treasuries because they feared that rising interest rates would leave them taking losses as bond prices fell (remember the price of a bond goes down when interest rates increase) now don’t have that worry deterring them from buying Treasuries. They might even pick up a small capital gain if bond yields retreat some more. So far in 2010 Treasuries have returned 3.5% including reinvested interest, according to Bloomberg News.
Add in a shift in risk so that the euro is now the currency that looks like it will be worth less tomorrow instead of the dollar, and you’re got good reasons for buying Treasuries.
And the U.S. Treasury gave safety-seeking yield investors another reason to look at paper issued in Washington. While the headlines from Europe scream about slow growth and worries that governments there won’t be able to cut their budget deficits, the United States announced on May 5 that it would start to trim the size of its long-term debt offerings for the first time in three years.
Seems that an improving U.S. economy is bringing in more tax revenue, reducing—very modestly—the government’s need to borrow. In its May quarterly refinancing, for example, the Treasury said it would issue just $78 billion in bonds. That would be down from $81 billion, the all-time record, in February.
As I said the change is very modest. But it is a move in the right direction for a change.
The United States selling less debt. Who would have thunk it?
Ed,
Love the move short gold:).
Still like the move short long term bonds for the next 1-2 years. Think it can really get moving.
Still lots of psychological damage in the US. We need some great growth figures to get the confidence up a bit. Too skirmish. I will say banks are starting to lend a bit now. Our International business bought into a domestic competitor and am able to get pretty good financing terms… Did take pristine credit and a lot of cash up front…
Ed… if I may ask, what did you use to short gold?
USDAportfolio,
One of the reasons I bought a short on gold yesterday. 😉
As for gold, I have some interesting anecdotal evidence regarding where it stands in its current bull market run.
I was enjoying some outdoor dining the other night, and a group of four young men was sitting at the table next to me. They appeared to be just out of college, and starting careers.
The topic of interest was gold. The one young man was boasting about how he had made a lot of money in gold, and was recommending that his friends do the same. They all agreed that gold was a good investment, and proceeded to discuss some of the recent negative economic news which proved that it would continue to be.
I remember similar discussions regarding buying real estate in 2005.
Another asset entering the “mania phase”: government bonds. If my government can borrow at those rates, great!
Bond investors will soon find themselves trapped between decreasing real yields and selling to realize a loss on a depreciating asset.
How long will it last?
When the effects of the stimulus policy and the restocking of inventories runs out in the second half, growth should slow. With political gridlock in Washington – Republicans and Democrats in a death struggle over cuting taxes vs. spending, etc., where will the political where-with-all to accomplish needed reforms be? The Fed is forced to monetize the debt causing a rise in inflation and fiscal problems.
An energy bill has almost the same prospects for success as a Gen. Custer-Dakota Indian peace treaty. The strong dollar will make the products of international, export based US companies more expensive – most likely cutting their profits. US citizens will eventually have to be happy with a lower rate of consumption and a higher savings rate, if debt is to be lowered. Lower consumption usually means lower growth in a consumer based economy. Interest rates will have to be kept low to help stimulate growth and prevent deflation. But this can lead to the creation of asset bubbles in the financial markets, credit, commodities, real estate, etc..
What we need is the creation of more companies that produce products that are creative enough to justify the higher prices caused by the strength of the dollar (e.g.Apple).
Off topic… Is oil oversold? I hope for a little bounce, but am not holding my breath.
http://www.claridenleu.com/research/index.cfm?fuseaction=market.reutnews&MarketID=123&detailType=newsDetail&nid=1274111982nN17267235&lang=en&cfid=350910&cftoken=23607227