Bonds Are Pricing In 0% Inflation Over The Next Decade

[Guest_ringledman_*]

http://www.madhedgefundtrader.com/

1) A Visit to the Insane Asylum. Watching the ten year Treasury bond tickle a 2.42% yield yesterday, I thought it would be propitious to revisit the insanity that is going on in THIS market.

Historically, ten year bond yields matched the nominal GDP growth rate. So an average 3.5% GDP growth for the past decade added to a 2.5% inflation rate gave you a bond yield trading around 6%. Today the math is from a different universe. A 2.5% GDP rate added to 0% inflation is giving you the 2.5% yield you see glaring at you from your screen today. The market is essentially betting that inflation will remain at zero for another decade.

There is one honking great problem with this scenario. Rampant inflation has already broken out in great swaths of the global economy. Anyone who purchases precious metals, commodities, energy, food, health care, user fees of any kind, or a college education can tell you, not only that inflation is alive and well, it is flourishing. Residents of China (FXI), India (PIN), and Turkey (TUR) and other emerging markets, and the commodity producing countries of Australia and Canada, can also tell you a lot about inflation.

The last place you can expect this stealth inflation to appear is in government statistics, a deep lagging indicator. And don’t ever expect inflation to show its ugly face where you want it the most, in your wages, pension benefits, or 401k returns.

Given the strongly positive yield curve, where 30 year yields are trading at a 3.7% premium to overnight rates, this is probably the best time in four decades to sell Treasury bonds. With rates this low, the market is not telling the government that it is issuing too much debt, but that it is not issuing enough. Personally, I don’t understand why the Treasury isn’t floating more paper at the long end. Maybe it has something to do with politics. At this point I have to replay John Maynard Keynes most famous quote, which I keep glued to my computer monitor, “markets can remain irrational longer than you can remain liquid.”

So, I wouldn’t be betting the ranch on Treasury bond shorts just yet. Better to limit yourself to cleaning out any last remnants of Treasury longs from your portfolio. When the turn does come, you’ll be wanting to jump with both feet into the 2X leverage short Treasury ETF (TBT), and day trade its younger, more athletic cousin, the 3X (TMV).

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Meet Your New Bond Fund Manager

[General Congreve]

Faber's a big gold fan too, saw an interview where a reporter asked him if the US could go back on the gold standard. Amusingly he replied, "Sure, if they revalue and ounce of gold to one million dollars!"

[Guest_ringledman_*]

Faber's a big gold fan too, saw an interview where a reporter asked him if the US could go back on the gold standard. Amusingly he replied, "Sure, if they revalue and ounce of gold to one million dollars!"

There is an analysis done by someone (can't remember who, may be Albert Edwards) that calculates an ounce at $70,000 I think on the basis of the amount of paper printed by the Fed since the last boom in gold and removal of the gold standard.

I would say $5,000 at least but depends how much the useless central bankers print.

[Meat Puppet]

What's interesting is that 5 year TIPS yields in the US are now at a previously unbelievable -0.3% so either investors are so desperate to protect against inflation that they will accept a negative real yield which makes no sense given that nominal 5 year bonds return just over 1%, or more likely there are no investors and Fed purchases alone account for it.

By contrast at the depth of the crisis towards the end of 2008 when 10 year treasuries were again around the 2.5% mark, TIPS yields went over the 4% mark due to deflationary fears.

I was about to write that this is one screwed up market but a market this is not.

[Realistbear]

I have most of my retirement money parked in William "Big Bill" Gross' bond funds (PIMCO) and am very uneasy about the returns with 15% this year on their high grade corporates. Trillions are invested and it seems that the market is still expecting massive Jap-style deflation. Could the market be wrong and the opposite is true making gold a wise choice even at todays levels and the fact that it has been oversold in relation to existing supplies?

ITM its finger near the sell button which is just a click away. It makes it easy to unload if the wind shifts but so far deflation still beckons as QE didn't work and is not likely to work given the deflationary spiral that looms.

[Realistbear]

http://www.bloomberg.com/news/2010-10-07/inflation-bonds-show-no-trichet-accord-amid-double-dip-threat-euro-credit.html

Inflation Bonds Show No Trichet Accord Amid Double-Dip Threat: Euro Credit

By Anchalee Worrachate - Oct 8, 2010 12:00 AM GMT

Bonds that signal investor inflation expectations show that traders disagree with European Central Bank President Jean-Claude Trichet’s declaration that another recession isn’t “in the cards.”

The gauge of how the market perceives consumer-price growth over five years beginning in five years’ time, a yardstick Trichet says is used by the ECB, slid this week to the lowest level in at least six years. In France, the yield difference between 10-year notes and inflation-linked debt fell to 182 basis points from this year’s high of 229 basis points in April.

Politicians can bluster, lie and manipulate the statistics, but in the end the market never lies and always wins.

[crudeFool]

Hi.

1. Precious metals - check
   
2. Precious metal equities - check
   
3. Commodity equities - check
   
4. Short US treasuries - ????
   

Anyone any opinions on the best way to short US treasuries? There are various ETF's out there - any UK based ones? Anyone had personal experience with them?

I've about 20% of my SIPP portfolio sitting in cash - the short US treasuries may be a nice gamble with half of it...

The article above warns it may not quite be the time to do this - when is the million dollar question.

Regards,

crude.

[Toto deVeer]

http://www.bloomberg.com/news/2010-10-07/inflation-bonds-show-no-trichet-accord-amid-double-dip-threat-euro-credit.html

Inflation Bonds Show No Trichet Accord Amid Double-Dip Threat: Euro Credit

By Anchalee Worrachate - Oct 8, 2010 12:00 AM GMT

Bonds that signal investor inflation expectations show that traders disagree with European Central Bank President Jean-Claude Trichet’s declaration that another recession isn’t “in the cards.”

The gauge of how the market perceives consumer-price growth over five years beginning in five years’ time, a yardstick Trichet says is used by the ECB, slid this week to the lowest level in at least six years. In France, the yield difference between 10-year notes and inflation-linked debt fell to 182 basis points from this year’s high of 229 basis points in April.

Politicians can bluster, lie and manipulate the statistics, but in the end the market never lies and always wins.

The world economy seems to be operating like a step function. There was a massive step down in late 2008 to early 2009, but only a tiny upward movement since then.

I suspect that there is another massive step down on the way before the end of Q1 2011. In fact, i find the 2011/2012 period quite worrying.

The currency wars and QE prospects are conveniently coming in the run up to the western Christmas period, traditionally the few weeks where retailers make 60% of their annual sales. I cannot envision any scenario where the consumer comes out in force this Christmas. 2009 saw 18,000 retailers go under in the UK alone. In the UK there is around 25 sq metres of retail space per capita, in the US there's around 46 sq metres of retail space per capita, and in Europe there's around 6.5 square metres.

The knock on effects of the retail implosion are going to have dire consequences to commercial real estate during the 2011/2012 period in both the UK and US.

Dominoes falling.

Edit: How does this relate to the OP's enquiry? Growth is going to be very low and the odds favour deflation. If this proves to be correct, then treasuries are priced correctly as well. For now.

Edited October 8, 2010 by Toto deVeer

[aa3]

With rates this low, the market is not telling the government that it is issuing too much debt, but that it is not issuing enough.

A point I have been making for some time.. even though I was considered to be from the insane asylum by many. Well us inmates not only have taken over the asylum but are running the countries now.

[tim123]

http://www.madhedgefundtrader.com/

"Historically, ten year bond yields matched the nominal GDP growth rate. So an average 3.5% GDP growth for the past decade added to a 2.5% inflation rate gave you a bond yield trading around 6%. Today the math is from a different universe. A 2.5% GDP rate added to 0% inflation is giving you the 2.5% yield you see glaring at you from your screen today. The market is essentially betting that inflation will remain at zero for another decade.

"

ISTM that they have priced in zero growth. That seems a much more likely result.