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30 Year Treasuries Graph

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There has been some fear lately in the media that bonds are about to break up and start rising to normal levels. So I brought up the chart on 30yr US Treasuries and drew the trend lines on the graph to see for myself. Looks pretty boring, the prices after this mini-run up are right in the middle of the long term trend.

Mr. Market might push yields up over the coming months to test the top of the channel, but it seems unlikely to me that it will break out.

My guess at what will happen: There will be a cyclical bull market as the market moves up to test the high side of the channel over the coming months, with the growing optimism. It might even briefly break slightly above the trend line.. where there will be enormous volume(resistance). Where it will ultimately fall back into the trend channel. Then it will bounce around and eventually there will be a test of the bottom of the channel. What is interesting is the next test of the support line on the channel is in negative territory. But the market will have to test it anyway.

Already to test the support of the trend channel, 30 yr treasuries would have to be at negative 1% or so. If there is a clear break to the upside over the next 2 years, it is the easiest short of a lifetime, because support will form at the breakout point, so your downside risk is low.

Either way this trend channel tells me something big is coming over the next 5 years with regards to asset prices. Either we go negative and enter a different world than any nation has experienced or we go to the upside and the value of assets will crash.

4g2hwl.jpg

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There has been some fear lately in the media that bonds are about to break up and start rising to normal levels. So I brought up the chart on 30yr US Treasuries and drew the trend lines on the graph to see for myself. Looks pretty boring, the prices after this mini-run up are right in the middle of the long term trend.

Mr. Market might push yields up over the coming months to test the top of the channel, but it seems unlikely to me that it will break out.

My guess at what will happen: There will be a cyclical bull market as the market moves up to test the high side of the channel over the coming months, with the growing optimism. It might even briefly break slightly above the trend line.. where there will be enormous volume(resistance). Where it will ultimately fall back into the trend channel. Then it will bounce around and eventually there will be a test of the bottom of the channel. What is interesting is the next test of the support line on the channel is in negative territory. But the market will have to test it anyway.

Already to test the support of the trend channel, 30 yr treasuries would have to be at negative 1% or so. If there is a clear break to the upside over the next 2 years, it is the easiest short of a lifetime, because support will form at the breakout point, so your downside risk is low.

Either way this trend channel tells me something big is coming over the next 5 years with regards to asset prices. Either we go negative and enter a different world than any nation has experienced or we go to the upside and the value of assets will crash.

4g2hwl.jpg

Fingers crossed for the latter.

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Either way this trend channel tells me something big is coming over the next 5 years with regards to asset prices. Either we go negative and enter a different world than any nation has experienced or we go to the upside and the value of assets will crash.

You're quite right IMHO. I wrote it in this site this week. 10 yr rates going to 1.0-1.5% or even lower in an absolute crash.

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I find it truly remarkable how low they are.

How in Gods name are they this low?

I understand you have QE, government manipulation and smoke and mirrors but they've managed to maintain it for years and years.

Perhaps you can defy gravity? :blink:

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I find it truly remarkable how low they are.

How in Gods name are they this low?

I understand you have QE, government manipulation and smoke and mirrors but they've managed to maintain it for years and years.

Perhaps you can defy gravity? :blink:

Sorry to be flippant, but your last line made me think of this.

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I find it truly remarkable how low they are.

How in Gods name are they this low?

I understand you have QE, government manipulation and smoke and mirrors but they've managed to maintain it for years and years.

Perhaps you can defy gravity? :blink:

Sorry to be flippant, but your last line made me think of this.

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There's so many bearish comments about the bond market, it certainly looks to me as though something unpleasant is not too far away.

Here's just one commentary......................

http://www.telegraph.co.uk/finance/comment/rogerbootle/10109059/When-the-bond-bubble-finally-bursts-a-lot-of-investors-will-get-hurt.html

I believe there was a thread on here quoting Jim O'Neill's similar comments on Bloomberg and elsewhere.

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Can you do the graph again but from 1945 onwards.

Looking at that graph it would appear that the problems started a long time ago and policy makers have been trying to avoid a corrective recession for 30 years and so far have managed to avoid the painful contraction.

History states that it's impossible to maintain it in the long term.

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I have no idea what this means.

30-YEAR TREASURY AUCTION TAILS, BONDS FALL

The results of today's 30-year Treasury auction are out.

The highest yield at the auction was 3.355%, above the 3.324% "when-issued" level.

In other words, the auction "tailed," indicating weak demand.

(The "tail" is the difference between the highest yield on the Treasuries during the auction and the expected high yield when the auction first gets started – the "when-issued" level.)

The bid-to-cover ratio, which measures the dollar amount of bids versus the dollar amount of bonds actually auctioned, fell to 2.47 from 2.53 at the last 30-year auction.

Read more: http://www.businessinsider.com/30-year-us-treasury-auction-13-2013-6#ixzz2W7cvYOFU

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Here is the ten year treasury yields going back all the way to 1790. The ten year has lower rates because they aren't locking in for as long. Notice how the 1982 peak was followed by a classic bull trap 2 years later, I've seen that chart pattern so many times.

Also look at how it is a near perfect retracement of the bond bear market that started in 1945.

I realize all the arguments I might make for why yield is so low in this day and age, I would have to make for the 1940's and 1950's. Which is strange because those eras were the greatest economic growth of the century for America. Although there are multiple ways to end up with low interest rates. Such as a high savings.. or simply lack of competing yield in the economy. Maybe a similarity in both eras is that governments could print money, have low interest rates.. and because of the technology of the day not face inflation.

It is the lack of inflation why I think interest rates will head back down in the US. As long as inflation is under 1% and falling, there is going to need to be an expansion of money in order to avoid deflation. This run started when Bernanke said they might start unwinding the Fed's balance sheet soon.

Of course for guys on this forum the dream scenario is the economy gets some legs of its own, firms start borrowing money for capital expansion, interest rates rise and asset prices come down to match yield.

9rpxzr.jpg

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It is the lack of inflation why I think interest rates will head back down in the US. As long as inflation is under 1% and falling, there is going to need to be an expansion of money in order to avoid deflation. This run started when Bernanke said they might start unwinding the Fed's balance sheet soon.

Of course for guys on this forum the dream scenario is the economy gets some legs of its own, firms start borrowing money for capital expansion, interest rates rise and asset prices come down to match yield.

Which forum? I would prefer the deflation solution. Need it to rebalance and restructure the market properly.

Too many firms have borrowed for capital expansion, during the boom and again into the reflation period. They should fail and be restructured at lower prices with smarter participants. Asset prices less likely to come down if we had that debt fuelled 'economy with legs' again, even if interest rates rose. More likely to have further borrowing to pay higher prices for housing, I would have thought.

With deflation, government debt is attractive to investors. Inflation wipes away debts, but also lowers the value of savers' money.

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Hey Traktion, yes version 3.1 now that I cannot find my old password:).

Erm, won't the server email a password reset token (or equivalent) to your address as registered? Or have you lost that too?

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Either we go negative and enter a different world than any nation has experienced or we go to the upside and the value of assets will crash.

.. or we stay roughly in the middle, and lets not be specific about time. Thanks for the chart but you don't know whats coming next.

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Government will sell bonds to raise money, the bond holder earns the right to redeem the bond on its maturity date for the face value the bond is worth. Some bonds are discount bonds (ie no payment until the maturity date), some bonds are coupon bonds (ie you get a fixed percentage payment every year eg 3% interest)

The yield is effectively the rate of interest that the bond pays, this is going to depend on interest rates in the economy (the higher interest rates are, the higher the yield on the bond otherwise investors would not buy bonds they would just invest somewhere else to take advantage of the higher interest) and also, especially for longer term bonds, the risk of default, which is why the yield on 10 year Greek bonds is nearly 16% whereas German bonds are about 3.something% even though they have the same rate of interest in their economy (the one set by the ECB). Investors who are buying Greek bonds want more interest because they are risking the Greeks defaulting on the bond.

Remember that there will be different yields for bonds of different maturity dates eg UK 3 month bonds are 0.83% and 10 year bonds are 3.57%, the short term ones have a low yield because interest rates are so low at the moment in the UK, but investors wouldn't expect interest rates to stay this low throughout those 10 years. Also because investors have "liquidity preference" ie they prefer to not tie up their money for too long, yields on longer term bonds are always higher to compensate investors for buying such a long term bond (effectively they are lending to the government over a longer term). Hence the 'yield curve' is usually upward sloping...the yields of bonds set to mature in longer terms, tends to be higher than those set to mature in short terms.

As for why it is bad if yields rise, they will have risen for one of two reasons:

1 - the perceived risk of government default has risen

2 - interest rates have risen or there are expectations of interest rate rises

whilst interest rate rises are likely to mean less investment and a reduction in output, it doesn't always mean that a rise in bond yields is a bad sign...when you have a booming economy, you may find yields on bonds rise because people expect the central bank to put up interest rates to try and deflate the boom and head off inflation. When recessions are expected, yields on short-term bonds might fall because people expect the central bank to reduce interest rates to try and stimulate the economy, whilst the longer term bonds won't fluctuate as much because investors will think that over time the interest rates will go back to the level they used to.

The reason yields on MOST countries' government bonds are quite low is because in general governments aren't going to default. The argument that they can just 'print money' to pay isn't really the full story. The reason government debt is seen as safe is because they control the means to tax the people, so if they need money they can raise taxes.

You are basically right about the idea that printing money would create inflation, and this would be worthless because it just means next time you borrow you have to borrow at higher interest rates because investors expect higher inflation.

They can print money to pay debts, which is effectively a tax on the money stock, its the 'inflation tax' (seignorage) ie it creates inflation and erodes the value of the money everybody else holds. The problem is then once people realise the government is printing money to pay its debts they realise money growth is going to be too high so they expect inflation to be higher, so people start holding less money (because they fear it will be eroded) and start switching to holding assets instead, in some countries you will get people buying up antiques, expensive carpets etc, as a way of saving because they buy things that they expect will hold their value rather than be eroded by the inflation. The problem there is that as people are holding less money, the money stock is lower, so its harder for the government to raise seignorage revenue through printing money. The revenue comes from a 'tax' on the money stock, so if the money stock is lower, because money demand is lower, then the government needs to print money at a faster rate to raise decent amount of seignorage revenue. This is how hyperinflations start eg in Zimbabwe, hyperinflations are nearly always due to a government printing money to cover its debts.

But also consider this from the point of view of an investor...if a country starts printing money and inflation goes up then the investor loses out because the bonds are denominated in that country's currency. If inflation is high then it will push down the value of that currency, so say you buy Argentinian bonds and are offered a yield of 5% on them, but then inflation flies to 30% in Argentina, then the value of your savings are getting eroded by that inflation. So when Argentina wants to borrow in the future, it will need to offer yields of say 32% to get people to buy their bonds. So you can't get out of it that easily by printing money otherwise everyone would do it.

As for why Greece can't print money - Greece doesn't have its own currency. The European Central Bank controls how many Euros are printed, Greece can't print Euros. Even in the UK, where we have an independent central bank (the Bank of England) - the UK Treasury can't print money, only the Bank of England can, and the Bank of England's mandate is to control inflation it is not there to function as an arm of the elected government. This is an argument in favour of central bank independence, it creates confidence on the markets that the UK government won't resort to printing money to cover its debts if it gets in a mess, as the elected government actually doesn't control monetary policy.

It is rare that governments actually default - Greece, Ireland and Portugal are at very serious risk of default. The UK bond yields have been quite low even through the financial crisis, although some doom-mongers in the press hyped up that we were bust a year ago, the markets never saw the UK as being a realistic risk of default.

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There has been some fear lately in the media that bonds are about to break up and start rising to normal levels. So I brought up the chart on 30yr US Treasuries and drew the trend lines on the graph to see for myself. Looks pretty boring, the prices after this mini-run up are right in the middle of the long term trend.

Mr. Market might push yields up over the coming months to test the top of the channel, but it seems unlikely to me that it will break out.

My guess at what will happen: There will be a cyclical bull market as the market moves up to test the high side of the channel over the coming months, with the growing optimism. It might even briefly break slightly above the trend line.. where there will be enormous volume(resistance). Where it will ultimately fall back into the trend channel. Then it will bounce around and eventually there will be a test of the bottom of the channel. What is interesting is the next test of the support line on the channel is in negative territory. But the market will have to test it anyway.

Already to test the support of the trend channel, 30 yr treasuries would have to be at negative 1% or so. If there is a clear break to the upside over the next 2 years, it is the easiest short of a lifetime, because support will form at the breakout point, so your downside risk is low.

Either way this trend channel tells me something big is coming over the next 5 years with regards to asset prices. Either we go negative and enter a different world than any nation has experienced or we go to the upside and the value of assets will crash.

4g2hwl.jpg

If we follow the trend channel long enough even the peak will hit zero by 2030, so the trend needs to break at some point.

Investing at these yields is just not worth the risk.

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That chart suggests growth over the long term has been achieved by allowing interest rates to slowly head towards 0, with some aggressive spikes upwards.

Does seem that way. As if the whole thing was headed to zero, so the system got changed before it got there, and the last 4 decades are the result of those prior changes.

Further changes will be needed but it is not possible to determine from that chart alone what the interest rate trend is likely to be.

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  • 245 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% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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