Conventional wisdom (*) says that taper will cause Bond yield to surge

bluelobster

I guess that has to be right since the 10 year has dropped 30 basis points since they started tapering.

Obviously, there are many factors at play, emerging market currency meltdowns, being a big one.... but let's face it, once again, conventional wisdom, no matter how well pontificated, is is pretty stupid

jmski52

If you like your retirement plan, you can keep your retirement plan. To your point, what makes you think that they haven't made a special effort to manipulate the 10 year Treasury using Interest Rate Swaps since the taper started? It's not like they haven't done whatever else they've felt like doing, whenever they've felt like doing it, such as Libor manipulation for example.

To suggest that the numbers are somehow different and that the relationships between rates and liquidity creation is somehow stupid and no longer matters or even some type of conventional wisdom that no longer applies - is a spurious assertion, at best.

Yeah, ask Turkey how they like taking the hit this time around.

bluelobster

I guess "they" are using swaps and buying Bunds too.

jmski52

I guess "they" are using swaps and buying Bunds too.

Yup, I guess they are. If you like your bank, you can keep your bank, BL.

bluelobster

To be clear jmski, I never suggested a relationship, spurious or otherwise, I am certainly not saying tapering will cause rated to fall, just that the popular assumption, that tapering must inevitably cause bond yields to rise sharply, is, uh...not the smartest of positions, if by smart, we are saying how it plays out in the real world, which is the final arbiter. I don't know how it plays out, none of us really know. There are many variables and the current market action gives us a peak through the window into that, no?

jmski52

The relationship between money creation and bond yields has been well established long before either one of us were ever born, so when you said that it was "conventional wisdom" or stupid to think that the relationship no longer applies - is simply wrong, wrong, wrong! Yes, emerging currency meltdowns are another factor and certainly a by-product of the tapering, but the math never changes unless acted upon by an outside force, i.e., manipulation via derivatives. My opinion.

Who said it, "you can ignore reality, but you can't ignore the consequences of reality". The math never changes.

The smart position is to try and understand how the math is being skewed. My opinion.

bluelobster

<< <i>
Who said it, "you can ignore reality, but you can't ignore the consequences of reality". The math never changes.

. >>



I agree with the statement above, sure the math never changes, but I don't think very many know what the equation is...

For me, reality would be be the actual price action(events), but with my puny brain, I don't know of much else to go on.

MGLICKER

Look at the Argentine markets for guidance. With massive deficit spending comes huge inflation and soaring interest rates. US has a bit more control of the markets than the smaller nations. But when we tank, it will of Titanic proportion.

jmski52

The problem isn't with anyone's brains. It's simply that we don't get to have access to good data. We can surmise, we can do the math and we can estimate - but we don't get to know what the inputs really are.

cohodk

Conventional wisdom (*) says that taper will cause Bond yield to rise slightly

Fixed your title.

derryb

<< <i>Conventional wisdom (*) says that taper will cause Bond yield to rise slightly

Fixed your title. >>


Jim Willie's says "slightly" is all it will take.

Baley

continued rotation of asset bubbles and crashes in all of the major asset classes over the intermediate-term (half generations to generations, call it 15-45 years) are conditioning educated people to be ready for the next one, to a still-small but increasing prevalence. Witness how fast news is reported and the financial markets react these days, versus just 20 or 40 years ago.

I'm about halfway through my life, and since I've been paying attention to these matters, I've participated in 3 stock market bubbles and crashes, 2 for gold/silver, and 2 for rental real estate. Those are my main 3 categories for asset allocation, but have also witnessed booms and busts in values of stamps, old cars, trading cards, certain art and antique segments, as well as things like energy futures, raw land, time shares, geeze the, list goes on an on.

Anyway, bonds have been due to fall for years now, and somehow manage to keep on not doing so. Someday yields will "surge" but today ain't that day.

derryb

i suspect the affect of bonds on interest rates and the subsequent affect of interest rates on IR derivatives will be next MAJOR crisis.

Icollecteverything

Latest quote from Bernanke: "The problem with QE is that it works in practice but it doesn't work in theory.

cohodk

<< <i>

<< <i>Conventional wisdom (*) says that taper will cause Bond yield to rise slightly

Fixed your title. >>


Jim Willie's says "slightly" is all it will take. >>



We've already had slightly. The world has not ended.

Baley

<< <i>

<< <i>

<< <i>Conventional wisdom (*) says that taper will cause Bond yield to rise slightly

Fixed your title. >>


Jim Willie's says "slightly" is all it will take. >>



We've already had slightly. The world has not ended. >>



The world does not end very often.

derryb

End of the world?

If that's why you stack you're a fool. Smart stackers are not preparing for the end of the world. They are preparing for the approaching end of their currency's strength. Each and every small rise in bond yields reinforces their decision. To not recognize the importance of rising bond yields and their affect on interest rates (and ultimately the IR Swap time bomb) is also foolish.

bluelobster

My best guess is rates will surge when the "majority" quit assuming it is fact, that still may not be for years who know's?


There's no doubt there's is more risk to yields going up overtime than down, but as rates relate specifically to the taper, one of the key points dripping with irony is that while many think tapering itself, will cause rates to rise, at the same time it is by definition reducing liquidity the US and global economies. Historically when liquidity is removed from the world economy US rates have dropped. It will be fascinating to see many opposing forces interact...string theory may be less complicated.

bluelobster

That taper continues to put pressure on rates....jk

In light of the stagnant growth trend and deflationary commodity trends, one has to wonder if it really was necessary to have the bond purchase program to keep rates low. Of course hindsight is 20/20, and It did add liquidity in a round about way, and that seems to be the biggest impact, but from a rate perspective only, you have to wonder if it hit it's mark.

BTW, Safe to say, Jim Willie might not be as smart as he thinks.

cohodk

All I hear on this board is how lousy the economy is. If thats so, why would rates rise?

Only imminent govt collapse or a strong economy will make rates rise considerably.

cohodk

There's no doubt there's is more risk to yields going up overtime than down


Perhaps the greatest risk is that yields stay low for a long time.

bluelobster

<< <i>There's no doubt there's is more risk to yields going up overtime than down


Perhaps the greatest risk is that yields stay low for a long time. >>



Quite possibly...or what it portends

As a side note, we may have made an intermediate reactionary low in yields this morning. I was trying to get some short dated calls on TBT, early this morning, but because of the volatility, the premiums were too out of whack for me.

MGLICKER

<< <i>All I hear on this board is how lousy the economy is. If thats so, why would rates rise?

Only imminent govt collapse or a strong economy will make rates rise considerably. >>



Rates got slammed earlier and fell below 2.00% for a bit.

Most striking to see Italy at 2.31%. That may not be such a good bet if Germany pulls out of the Euro.

cohodk

<< <i>

<< <i>All I hear on this board is how lousy the economy is. If thats so, why would rates rise?

Only imminent govt collapse or a strong economy will make rates rise considerably. >>



Rates got slammed earlier and fell below 2.00% for a bit.

Most striking to see Italy at 2.31%. That may not be such a good bet if Germany pulls out of the Euro. >>



Or if an asteroid hits Berlin.

MGLICKER

<< <i>

<< <i>

<< <i>All I hear on this board is how lousy the economy is. If thats so, why would rates rise?

Only imminent govt collapse or a strong economy will make rates rise considerably. >>



Rates got slammed earlier and fell below 2.00% for a bit.

Most striking to see Italy at 2.31%. That may not be such a good bet if Germany pulls out of the Euro. >>



Or if an asteroid hits Berlin. >>



Germany has done many widely unpopular moves in the last 100 years. If Germany leaves the zone, Italy and Spain yields will resemble the current 10% rate of Brazil. Maybe higher.

Lots of risk for a 2.31 return.

cohodk

2.3% might be better than equities, real estate or gold. Where is the real risk?

MGLICKER

<< <i>2.3% might be better than equities, real estate or gold. Where is the real risk? >>




You are correct it may be better than the above mentioned assets.

Real risk is that it is paid off in highly diluted, newly created Lira or that the debt takes a haircut as the Greek debt did.

One can hold US or UK debt at near the same rate.

jmski52

<< 2.3% might be better than equities, real estate or gold. Where is the real risk? >>

The real risk is that they are so bankrupt that they have to pump more and more money into the system to keep it going that rates are forced down and the bonds lose more principal quickly.

MGLICKER

Meanwhile.......The fed is out of gas pedals to stomp on.

Time for shovel ready, part II?

bluelobster

<< <i><< 2.3% might be better than equities, real estate or gold. Where is the real risk? >>

The real risk is that they are so bankrupt that they have to pump more and more money into the system to keep it going that rates are forced down and the bonds lose more principal quickly. >>



I'm not sure why pumping more money in the system would:
1) force rates down
and
2) if rates went down, why bonds would lose more principal quickly?

jmski52

I'm not sure why pumping more money in the system would:
1) force rates down
and
2) if rates went down, why bonds would lose more principal quickly?

My mistake. Bond prices would go up as rates go down. The risk is only that of a default on the principal, but that risk is always there. Of course, if you're bankrupt, that could happen.

MGLICKER

<< <i>Of course, if you're bankrupt, that could happen. >>



Unless the Eurozone splits and each nation can once again create unlimited currency. In that case the nation is never really broke. Ask Brazil!