Tuesday, July 05, 2011

Victory lap

Readers here knew to be aware of the likes of Nicholas Taleb and Bill Gross proclaiming the death of Treasuries. These reports have certainly been premature. Long ago I wrote about the great Rate Compression, and the danger of deflation given my view of the Fed's misguided monetary policies, and how rates would not, could not rise for years given prevailing economic conditions.

This compression will continue, but there will be plenty to say about up-coming macroeconomic themes and effects given the news in Europe, and the coming conflicts in Asia.

(From Bloomberg)

After failing to predict this year’s Treasury rally, Wall Street’s biggest bond traders are sticking to forecasts that government bonds will fall as the economy recovers and concerns over a European debt crisis recede.
Yields on 10-year Treasury notes will rise to 3.5 percent by the end of 2011 from this year’s low of 2.84 percent on June 27, according to a Bloomberg News survey of the 20 bond dealers that serve as counterparties to the Federal Reserve in its open market transactions. The higher rate is still only half the 7 percent average on the securities over the past four decades.
While Speaker of the House John Boehner says the country is broke, and the Federal Reserve has flooded the financial system with dollars, U.S. debt has returned 2.09 percent since December, including reinvested interest, almost triple the 0.7 percent for government bonds worldwide, according to Bank of America Merrill Lynch index data. Yields near record lows have frustrated fixed-income investors looking for more return.
“People make comments that rates can’t stay this low because there is sticker shock when they look how far we’ve come,” said Jeffrey Schoenfeld, a partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “But we are in a moderate growth recovery with little evidence of inflation pressure and the Fed in no hurry to change its stance. The path of least resistance is very low” rates for a long time, he said.

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