Deflation Is Now Dominant Theme In The Bond Market

[Realistbear]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7862380/Warning-signals-of-a-double-dip-recession-flash-brightly-across-the-world.html

Warning signals of a double-dip recession flash brightly across the world

Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation.

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 2.96pc.

Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.

Mr Reid said

deflation has emerged as the dominant risk in the West

and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.

..../

The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that

Japan itself may be sliding back into deflationary deep freeze.

Japan’s unemployment rose in May for the third straight month to 5.2pc. Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Deflation cometh and with a vengeance that not even the Japanese will relate to after their monster housing bubble deflated.

Bond markets do not do opinions, they are the market. QE in excess will be countered by a bond market risk aversion response trapping prices in a vortex of spiraling down prices as demand is devastated.

Edited June 30, 2010 by Realistbear

[Guest Steve Cook]

http://www.telegraph...-the-world.html

Warning signals of a double-dip recession flash brightly across the world

Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation.

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 2.96pc.

Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.

Mr Reid said

deflation has emerged as the dominant risk in the West

and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.

..../

The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that

Japan itself may be sliding back into deflationary deep freeze.

Japan’s unemployment rose in May for the third straight month to 5.2pc. Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Deflation cometh and with a vengeance that not even the Japanese will relate to after their monster housing bubble deflated.

Bond markets do not do opinions, they are the market. QE in excess will be countered by a bond market risk aversion response trapping prices in a vortex of spiraling down prices as demand is devastated.

So, if deflation is the major risk, then our governments will start the presses no?

Why wouldn't they?

[aa3]

I was going to post about the move in US treasuries today too:). Under 3% on the 10 year now. The big boys who play in the bond markets are clearly pointing towards deflation. Flight to treasuries.

When QE was ending the 10 year moved up to near 4%, as there was suspicion that QE would be continued. But as austerity has taken over the bond yields have been gradually coming down.. but over the last few weeks they seem to have really powerfully moved down.

An interesting factor which I naturally predicted was the interest costs for the US government are coming down, even as the debt rises rapidly.

Can they go further? -Maybe there will be a counter move soon, but over the long run yes they can go lower than 3% for 10 year. Japanese 10 years are at 1.25%.

[aa3]

Wow insane Japanese 10 year bonds are at 1.075% right now. And this is a country which has over 200% of gdp national debt, and 0.1% base rates. Yet bond investors think 1.075% yield on 10 year bonds is a good investment.

In many ways they are right. Think of what 100,000 yen can buy in a computer today compared to 100,000 yen 10 years ago.

[Meat Puppet]

Here is good old Ambrose flying the money printing flag:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

This sounds interesting:

Roberts said the Fed will shift tack, resorting to the 1940s strategy of capping bond yields around 2pc by force majeure said this is the option "which I personally prefer".

I can only imagine where gold will go to under this scenario.

[Oliver Sutton]

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 2.96pc.

Denninger was going ape a few months ago when this reached 4%. It was going to bring the whole edifice down.

Funny how the TFHatters pick on a particular index and then quietly move on to the next one that looks bad. Haven't heard much about the Baltic Dry Index recently.

[Errol]

Haven't heard much about the Baltic Dry Index recently.

I think it's had a bit of a collapse of late -- heralding the next phase of the economic destruction.

[VeryMeanReversion]

Bond markets do not do opinions, they are the market.

Interesting point. The only thing against this is that at some point, there can be a sovereign default and inflate that way.

"bond market says deflation" is good enough for me using the "inflation = increses in money+credit supply" definition. However, I'm still going to max out on NS&I index linked since I expect rising prices of goods due to a weak £.

[interestrateripoff]

Deflation is part of the normal economic cycle.

[lowrentyieldmakessense(honest!)]

the bond market has a history of getting it wrong

[NorthamptonBear]

.

Funny how the TFHatters pick on a particular index and then quietly move on to the next one that looks bad. Haven't heard much about the Baltic Dry Index recently.

thanks for the reminder...

The Baltic Dry Index (BDI) has fallen from 4,074 points in the beginning of June 2010 to 2,482 points on Monday, 28 June 2010.

http://www.moneylife...cle/8/6599.html

Pacific Capesize Index has fallen by a third in one week, ending Monday at 26,761 points.

The index, which mainly reflects shipping demand for iron ore and coal cargoes from Australia to Asia, lost 13,539 points.

Transpacific round voyage time charter earnings for 172,000 dwt vessels fell by $106,000 per day or 43% to $140,000 per day, the broker said.

http://www.lloydsshipmanager.com/ll/news/ssy-capesize-index-tumbles/20017543513.htm;jsessionid=98C8C30ED46F4C669CF7F6AC7DB7FEE4?src=ticker

Edited June 30, 2010 by NorthamptonBear

[Ruffneck]

http://www.guardian.co.uk/business/2010/jun/28/gold-new-high-double-dip-recession

Gold may reach new high amid fears of double-dip recession

• Analysts claim bullion could hit $1,430 an ounce

• Precious metal is popular hedge against rising prices

The gold price could smash new records as investors pile into bullion on fears of a worsening economic outlook. The spot price today flirted with the all-time high of $1,264.90 (£838.93) reached last week.

"Debt on government balance sheets and worries that the world could be heading towards a double-dip recession are driving the gold price higher," says Charles Cooper at Oriel Securities.

The World Gold Council (WGC) says gold is being buoyed by interest across the board: private investors are buying increasing quantities of gold coins and bars, shareholders are deepening their exposure to gold-mining companies and central banks are buying bullion on the open market.

Marcus Grubb, the WGC managing director says: "The backdrop is the continuing financial crisis and people's desire to protect their wealth by investing in something that they believe is going to hold its value."

French bank Societe Generale forecasts that gold could reach $1,430 an ounce in the third quarter of this year with many analysts predicting that the precious metal's rise will continue into 2011.

Some investors fear the world could be heading into a second leg of the financial crisis with the European banking system at risk from debts racked up in southern European countries such as Greece, Portugal and Spain. "There is concern that governments around the world could resort to printing more money to dig us out of a hole," says Cooper. "That could precipitate inflation, good for gold which is used as a hedge against rising prices."

In the City, gold-backed exchange traded funds are reported to be accelerating their purchase of gold to satisfy mounting investor demand. Today, the gold price closed in London at $1,247 an ounce, but still a long way shy of the inflation-adjusted high of $2,200 in 1981. The WGC says that Saudi Arabia, China and Russia have been buying gold, while western European countries have stopped selling bullion after years of being net sellers.

China recently disclosed that it was holding 1,000 tonnes, double earlier estimates. The US central bank is the biggest holder of gold with more than 8,000 tonnes.

Adding to the bullish backdrop for the metal were comments from US intelligence officials that Iran has enough fissile material for two atomic bombs. Gold is the investment of choice during times of geopolitical uncertainty.

The falling euro reinvigorated the safe-haven sweep into both the dollar and gold, prompting the two to move in tandem. That is a break with tradition as gold usually falls as the dollar strengthens, but that link has been broken.

"The underlying safe-haven concerns that have supported prices – the economic environment, Europe's fiscal outlook and the longer-term prospects for inflation, remain," said David Moore, commodities strategist at Commonwealth Bank of Australia.

[Gone baby gone]

I think it's had a bit of a collapse of late -- heralding the next phase of the economic destruction.

Yep, it's pretty much back to where it was in early 2009, and that's not a good place to be:

http://www.bloomberg.com/apps/quote?ticker=bdiy&exch=IND&x=15&y=11

[scottbeard]

So, if deflation is the major risk, then our governments will start the presses no?

Why wouldn't they?

Because that would increase the wrath of the bond markets against them and make the problem worse?

[skomer]

Denninger was going ape a few months ago when this reached 4%. It was going to bring the whole edifice down.

Funny how the TFHatters pick on a particular index and then quietly move on to the next one that looks bad. Haven't heard much about the Baltic Dry Index recently.

The BDI is down sharply this month - apparently due to lower demand from China..... perhaps a forward indicator of the double-dip

http://www.moneylife.in/article/8/6599.html

[Guest Steve Cook]

Because that would increase the wrath of the bond markets against them and make the problem worse?

It's a case of shit or shitter

From the state's perspective, printing could well precipitate collapse a little later down the line. However, not printing will precipitate a collapse right now.

buying time.....that's the only game left in town

Edited June 30, 2010 by Steve Cook

[Injin]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7862380/Warning-signals-of-a-double-dip-recession-flash-brightly-across-the-world.html

Warning signals of a double-dip recession flash brightly across the world

Global bond markets are flashing warning signals of a sharp slowdown in growth across the world and a possible slide toward a double-dip recession and outright deflation.

The yield on two-year US Treasuries has fallen to a record low of 0.61pc in a flight to safety, a level not seen during the depths of the Great Depression. Ten-year yields dropped below the psychologically sensitive level of 2.96pc.

Such levels are clearly incompatible with assumptions on Wall Street for 3pc growth in the second half of this year. “If the bond market is correct then this recovery could be dead in the water,” said Jim Reid, credit strategist at Deutsche Bank. The credit markets tend to sniff out trouble first and have acted as an early warning alert at every stage of the financial crisis over the past three years.

Mr Reid said

deflation has emerged as the dominant risk in the West

and will force central banks to renew quantitative easing, the Americans “pre-emptively” and the Europeans “only when their backs are against the world”.

..../

The flight to safety in Tokyo depressed yields on Japanese 10-year bonds to 1.11pc. There are concerns in any case that

Japan itself may be sliding back into deflationary deep freeze.

Japan’s unemployment rose in May for the third straight month to 5.2pc. Industrial output fell slightly. Production of capital goods – a leading indicator – fell 4.4pc.

Deflation cometh and with a vengeance that not even the Japanese will relate to after their monster housing bubble deflated.

Bond markets do not do opinions, they are the market. QE in excess will be countered by a bond market risk aversion response trapping prices in a vortex of spiraling down prices as demand is devastated.

The bond markets have missed pretty much every major event in world history and always got suckered by inflation.

In addition, as you have already been shown about 30 or 40 times, japan never had a deflation. Kindly stop mentioning it and come up with a new way to ramp fiat for whoever it is pays you to type this bilge.

[ken_ichikawa]

Stuff

You know Injin, reading The moon is a Harsh Mistress I can't help but think you are the main protagonist in the book.

[scottbeard]

In addition, as you have already been shown about 30 or 40 times, japan never had a deflation. Kindly stop mentioning it and come up with a new way to ramp fiat for whoever it is pays you to type this bilge.

Who is holding all this yen you say they exported and how did they get it?

[Injin]

Who is holding all this yen you say they exported and how did they get it?

Pensons funds, speculators, icelandic and other banks, even some peopel buying houses...

Particleman had a great link about it a while back. Em's blog also has posts about the carry trade, if you wanna go looking.

http://emsnews.wordpress.com/

[domo]

Sometimes yields can explode. Krugman and others have been quoting low rates as meaning government can borrow to infinity with no consequences, even though Greece went from nought to bankrupt in under 6 months.

[EUBanana]

Funny how the TFHatters pick on a particular index and then quietly move on to the next one that looks bad. Haven't heard much about the Baltic Dry Index recently.

Just for you.

Looks like it's back to the old pre insanity equilibrium more or less.

[domo]

If you consider 2006 as a model of fiscal austerity.

[Realistbear]

So, if deflation is the major risk, then our governments will start the presses no?

Why wouldn't they?

If Merv fired up the presses 2 things will happen immediately:

1. IR would soar.

2. House prices would not just fall they would go headlong into an economy busting crash. Demand would collapse for everything depressing prices and leading to massive job losses--and yes, more deflation.

[Realistbear]

The bond markets have missed pretty much every major event in world history and always got suckered by inflation.

In addition, as you have already been shown about 30 or 40 times, japan never had a deflation. Kindly stop mentioning it and come up with a new way to ramp fiat for whoever it is pays you to type this bilge.

You best write to the author of the article with your arguments in support of the notion that deflation is a myth.

Why fear it? Embrace it--it will be good for house prices and you know it makes sense.