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R K

Get Used To U.s. Yields Nearer 4% Than 2%

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http://www.bloomberg.com/news/2013-06-11/jim-o-neill-says-get-used-to-u-s-bond-yields-nearer-4-than-2-.html

Investors should get used to U.S. Treasury yields rising toward 4 percent as the 30-year bull market in bonds comes to an end, according to Jim O’Neill, former chairman of Goldman Sachs Asset Management.

“It’s all part of this big normalization that’s going to happen,” O’Neill said in an interview in London today. “In the process, there could be quite ugly days.”

The benchmark 10-year Treasury yield slipped 0.02 percentage point to 2.19 percent at 2:50 p.m. New York time. It earlier climbed to 2.29 percent, the highest since April 2012 and up from a record-low 1.38 percent on July 25.

Ten-year yields, which were last above 4 percent in April 2010, may reach that level “not next week, but in the next couple of years if the U.S. is getting back to normality,” O’Neill said.

The global economy is “in the early stages of the recovery of the equity culture and perhaps the end of a 30-year growing love affair” with bonds, O’Neill said earlier in an interview on Bloomberg Television’s “On The Move” with Mark Barton.

The Federal Reserve is buying $85 billion of Treasuries and mortgage securities each month to support the world’s largest economy by putting downward pressure on borrowing costs. Speculation the central bank may taper its debt purchases in the coming months may damp demand for emerging-market bonds, as well as U.S. debt, said O’Neill.

Weakest BRIC

“When the game starts to change with central banks, it is inevitable bonds are going to suffer,” he said. “If we see U.S. bond yields rising further and more and more people thinking about the Fed tapering, you’re going to see some further reaction in many, many emerging markets, particularly where there’s current account deficits.”

O’Neill, 56, stepped down this year as chairman of Goldman’s asset-management division, a post he has held since 2010. He joined the company in 1995 as a partner, became head of global economics, commodities and strategy research in 2001 and was added to the European management committee in 2006.

India is the weakest of the so-called BRIC group of emerging economies, which includes Brazil, India and China, and the nation’s democracy sometimes “smothers” decision making, O’Neill said. The rupee touched a record low of 58.9850 per dollar today.

O’Neill said he would buy Bangladesh assets over their Indonesian counterparts, speaking at the Bangladesh Investment Summit in London today.

Turkey Vulnerable

Turkey is at risk due to the global bond selloff because of its current-account deficit, said O’Neill. Anti-government protests in the country may have wider significance for countries in the Middle East looking to Turkey’s democracy as an example.

“For the sake of many places beyond Turkey, it would be good to see an end to this trouble,” said O’Neill, who is a contributor to Bloomberg View. “Even without the trouble going on in Istanbul and other urban areas, Turkey would have been vulnerable.”

There is still value in assets from China as well as so-called peripheral euro-area nations, O’Neill said. The safest bonds may become less fashionable, he said.

“If the U.S. is returning to normality, which I have suspected for a while it is, and the Fed starts to change its own view about that then at some point, we have to get used to the notion of U.S. bonds being closer to 4 percent than 2,” O’Neill said.

He's been banging the drum for the US for some time now so not a surprising call.

Comes on the back of Bill Gross calling the end of the Bond bull in April.

The big beasts have made their call..........

edit: formatting/link

Edited by R K

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i am currently in the process of re-mortgaging with Yorkshire BS, 3.99% 10-year fix

make hay while the sun shines

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Linky: http://www.bloomberg.com/news/2013-06-11/jim-o-neill-says-get-used-to-u-s-bond-yields-nearer-4-than-2-.html

Speculation the central bank may taper its debt purchases in the coming months may damp demand for emerging-market bonds, as well as U.S. debt, said O’Neill.

“When the game starts to change with central banks, it is inevitable bonds are going to suffer,” he said. “If we see U.S. bond yields rising further and more and more people thinking about the Fed tapering, you’re going to see some further reaction in many, many emerging markets, particularly where there’s current account deficits.”

Perhaps including the UK's current-account deficit?

I'm thinking it could hit the values of all sorts of bonds, including the ones being punted out now by racecourses, for those who sought higher-yields. Although I'm less sure of this claim about re-emergence of equity culture. Obviously some opportunities out there, but I just see too much risk, especially with nations and individuals likely to be hit by falling bond values.

-A mighty flame follows a tiny spark.

Dante Alighieri

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closer to home the same thing is happening here.

UK 10 years bond up from 1.6 to 2.2% in 1 month.

Germany 1.2 to 1.6

France 1.6 to 2.2

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Things are really start to move in the right (wrong) direction for the UK. After taking a look at property prices and wages I am truly shocked how the UK statuesque goes on.

I thought we had it bad here, now I realize why my younger friends in the UK are so broke.

Why is there less activity on hpc these days, have people given up? They are happy renting whilst working 16 hours per week and claiming tax credits.

It is so sad to think of all the older generation in the UK who had it easy. I can think of several who are irresponsible, thick as tow short planks and cannot plan financially. These individuals have good 3 br semis and really had to work hard for their existence, yet hard working younger people that I know can't achieve this as the game is so rigged.

People will look back on this period of time and have sympathy for generation rent.

Ultimately it is generation rent who be bailed out when they give up working at 45 because there is no point in working as there is no future.

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Any of this fed into UK annuities yet ?

You use the 15 year gilts of the previous month to the start date. See here.

http://markets.ft.com/research/Markets/Bonds

They have risen 0.5% over the last month, but are still way below the 'norm' of 4 to 4.5%.

I'm taking a drawdown which gives me the opportunity in 3 or 6 years time to take an annuity if gilts rise.

The reduction in gilts over the last 2 years is worth about 5000 a year in an annuity. I would have been better off retiring 2 years early.

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You use the 15 year gilts of the previous month to the start date. See here.

http://markets.ft.com/research/Markets/Bonds

They have risen 0.5% over the last month, but are still way below the 'norm' of 4 to 4.5%.

I'm taking a drawdown which gives me the opportunity in 3 or 6 years time to take an annuity if gilts rise.

The reduction in gilts over the last 2 years is worth about 5000 a year in an annuity. I would have been better off retiring 2 years early.

Thanks

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Jill Treanor ‏@jilltreanor 39m

Haldane: Biggest risk to global financial stability? "disorderly reversion of gvt bond yields"

Jill Treanor ‏@jilltreanor 43m

Haldane "we have intentionally blown the biggest bond bubble in history"... Need vigilance as busts #business

Mods - my ability to use the 'quote' box on posts seems to have disappeared ir is failing for some reason

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Investors should get used to U.S. Treasury yields rising toward 4 percent as the 30-year bull market in bonds comes to an end, according to Jim O’Neill, former chairman of Goldman Sachs Asset Management.

“It’s all part of this big normalization that’s going to happen,” O’Neill said in an interview in London today. “In the process, there could be quite ugly days.”

The benchmark 10-year Treasury yield slipped 0.02 percentage point to 2.19 percent at 2:50 p.m. New York time. It earlier climbed to 2.29 percent, the highest since April 2012 and up from a record-low 1.38 percent on July 25.

I agree, at some point there will be a "big normalization", but we're still years away from it.

There'll be no bond bloodbath in 2013...or 2014...or 2015...On the contrary, if something nasty happens in Europe there'll be a flight to safety and bonds could actually scale new heights.

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closer to home the same thing is happening here.

UK 10 years bond up from 1.6 to 2.2% in 1 month.

Germany 1.2 to 1.6

France 1.6 to 2.2

And all at major support. USTs rose 1.2% y'day from major support and 10yr rates fell 1%.

10 yr rates going to 1-1.5% in due course. #Depression continues

Edited by Killer Bunny

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And all at major support. USTs rose 1.2% y'day from major support and 10yr rates fell 1%.

10 yr rates going to 1-1.5% in due course. #Depression continues

Surely that would mean less likelihood of a HPC? 10 yr UK gilts back down to 1.5% or thereabouts, more ZIRP from BOE, more money printing, more propping of housing market, more people looking to move into hard assets such as property?

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Surely that would mean less likelihood of a HPC? 10 yr UK gilts back down to 1.5% or thereabouts, more ZIRP from BOE, more money printing, more propping of housing market, more people looking to move into hard assets such as property?

Surely? careful.

Probably. The Budget was very good for HPs and economy until 2015/16 unless exogenous issues arise.

Downgrade after election? BBB 2nd half of decade? That's when we become #Greece.

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Surely that would mean less likelihood of a HPC? 10 yr UK gilts back down to 1.5% or thereabouts, more ZIRP from BOE, more money printing, more propping of housing market, more people looking to move into hard assets such as property?

The masses buy with credit though, so many many hard assets (houses) will just sit there until the price is affordable? The people looking to "park" or shield money are a tiny minority?

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Any of this fed into UK annuities yet ?

I don't think so, but at least it's being discussed now, and now Fisher comes out with his warnings of woe after first tiny bit of stirring from bond and gilt market.

He said: 'There is a widespread expectation that gilt rates will rise at some point in the next few years, possibly taking annuity rates back up at the same time, nevertheless pension investors should be wary of delaying their annuity purchase in the hope of getting a better deal in a few years’ time.'Gilt yield rises could be matched by asset price falls and pension investors should be cautious of delaying without considering the potential consequences.'

So matter of factly, 'Asset prices falls'. :)

http://www.dailymail.co.uk/money/pensions/article-2338854/Pension-annuities-fall-29-years-quantitative-easing.html

10 yr gilt yields up sharply again today.

UP 10bps in two days.

Probably another false dawn.

10 year gilts down again

Yield up 20bps in 3 days.

http://www.bloomberg...ing-report.html

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So matter of factly, 'Asset prices falls'. :)

--------------------------------------------------------

(sorry I can't get the quote box to work on this thread for some reason)

Anyway, as I'm sure you know, gilt yields rising means gilts are falling.

It doesn't of itself mean other asset prices will also fall, unless there is some sort of dislocation. So equity markets could rise if profits continue rising, gilt money shifts into other asset classes, and/or it signifies that growth is returning.

Which seems to be the thrust of Jim O'Neill's thinking when he uses the word 'normalisation', at least as it refers to the US. Their housing bubble completely burst (real terms) and their household debt has delevered - unlike UK on both measures in sterling, but outside of London and in dollar terms you could argue we're not far off. UK could really do with writing down another chunk of household debt though! Instead we appear to have chosen slowburn real falls so perhaps 3-4% p.a. for say 3-4 years.

Edited by R K

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If they are talking about assets as in houses - then why would anyone who owns their house and has a pension give a ****** if its value falls !!

House price falls + annuity rates double = sorted.

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UK could really do with writing down another chunk of household debt though! Instead we appear to have chosen slowburn real falls so perhaps 3-4% p.a. for say 3-4 years.

Over the past few days the value of gilts has fallen for those who hold them. Values fallen when some participants in the market, sellers and buyers, transacted at lower prices. That transaction forced down the value of all the other holders of 10 year gilts. That's my understanding of it, if it's anything like shares. And yields go up up to keep existing holders content, and try and attract new buyers in a competitive global market where others may be offering higher returns.

I'm just suggesting all the money in Gilts isn't a pot of money sat there to be withdrawn to overly power other asset classes, but has a changeable value dependent upon what buyers and sellers transact at. Just as the market transacted RBS shares down. Gilt yields having to rise to hold and attract buyers.

How did and how does UK write down household debt?

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It doesn't of itself mean other asset prices will also fall, unless there is some sort of dislocation.

The original article suggests US bonds falling and yields increasing may have causation elsewhere.

“When the game starts to change with central banks, it is inevitable bonds are going to suffer,” he said. “If we see U.S. bond yields rising further and more and more people thinking about the Fed tapering, you’re going to see some further reaction in many, many emerging markets, particularly where there’s current account deficits.”

And maybe Gilts are falling, and yields rising, as people take a hedge position against housing, as some are suggesting is happening in the US?

Treasuries dropped on concern the biggest monthly surge in yields since December will prompt investors to sell government debt as a hedge against losses on mortgage bonds as borrowing costs climb to a 14-month high.

Yields on the 10-year note, a benchmark for mortgage and corporate loans, rose for a third day on the risk the increase will lead to an even bigger surge as investors place bearish bets to protect against housing-debt losses triggered by rising rates, a practice known as convexity hedging.

San Francisco Federal Reserve Bank President John Williams said last week a "modest adjustment downward" in the Fed's bond buying is possible as "early as this summer." The U.S. will sell $32 billion of three-year debt today.

It's the "liquidation of mortgage paper, which needs to be hedged because of convexity fears," said Thomas di Galoma, senior vice president of fixed-income rates trading at ED&F Man Capital Markets in New York. “People need to hedge out risk. That’s where the selling pressure is coming from.” The 10-year yield increased four basis points, or 0.04 percentage point, to 2.25 percent at 9:54 a.m. in New York, according to Bloomberg Bond Trader prices. It reached 2.29 percent, the highest since April 4, 2012. The price of the 1.75 percent note due in May 2023 fell 10/32, or $3.13 per $1,000 face amount, to 95 19/32.

11 June 2013: http://forexblog.oanda.com/20130611/us-bonds-fall-on-speculation-of-mortgage-hedge-sales/

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I'm wondering if this is going to be the straw that broke the camel's back. Once investors start demanding a normal, healthy above-inflation return on their investment in US government debt, which is supposed to be the safest possible investment class, everything else has to go up too. Why would you loan anyone else cash if it's more risky than loaning it to the US government and is also paying a lower rate?

It causes a cascade of other things to happen. Rates go up across the board. Taking it further, this puts stress on other areas of the system which could be enough to make them go pop.

It also calls into question those other highly indebted countries like the UK, so could force up the government's cost of borrowing. This could cause a loss of confidence in the UK's ability to repay its debts without having to fire up the printing press to inflate it all away. But that simply means investors will demand a higher yield to make sure that doesn't happen.

You then have to look at the UK banks. Why bother lending out cash on mortgages to get a measly 2-3% return (below inflation), when they could simply lend it to the US government for 10 years and get 4%?

So the UK government could struggle to raise the funds they need to keep going. This might force them to look very carefully at what they're spending their cash on. Anything that isn't essential could face the chop, including such things as stupidly extravagent mortgage guarantee schemes that put them right in the firing line if/when house prices go pop.

I think it will be interesting, to say the least. Once the herd is spooked, even governments can't control the markets.

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The original article suggests US bonds falling and yields increasing may have causation elsewhere.

Well of course they will. O'Neill warns about debt in emerging mkts with deficits.

He also said 'normalisation' over a couple of years. I qualified it with 'unless there's a dislocation'.

If you hadn't noticed, longer rates have been rising since their lows at the end of July '12. So too have equity and house prices (US). Hence 'normalisation'. i.e. Yield curve has been steepening.

Edited by R K

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  • 239 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
      • up 2.5%
      • up 5%



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