U.S. Treasuries Like "The Godfather"
The scene: "The Godfather" where Solozzo ("the Turk") complains that he shot Vito Coleone (the Godfather) five times and he didn't die. Corleone's continued vital signs screwed up the Turk's plans for ill-gotten gains by eliminating a man he considered an obstacle to his business. (Nothing personal, strictly business.) Here Don Corleone reminds us of U.S. Treasury securities. People keep taking pot shots at 'em, but they simply refuse to die. Last I checked, their vital signs were strong as ever.
Setting aside the colorful cinematic reference, it comes down to this: “No one” wants to buy treasuries, never mind the long treasury, even though they continue to provide a safe haven. "Everyone" knows it's foolish to buy treasuries. With their low yields, they can "only go down." It's not like when the 10-Year yielded 5% and crashed to 2%. You could make money on that trade. But now that they're at 2%, where can they go? As for the 30-Year, it's in even worse shape. After hitting an all-time low of 2.22% yield early 2015, it's been downhill ever since.
But it's not just recent price action. The bond bull market that began in 1982 has no more legs. How could it? It's old, feeble, an accident waiting to happen. And just look at the U.S. government's financial picture. Debt piled on top of debt. The government's "insolvent" - another accident waiting to happen. Why would you want to own government debt?
And there's more: China and other Emerging Market countries hold trillions of the USTs. They're selling like crazy as their markets and economies continue collapsing. They need money, and the most liquid securities held by their Central Banks include U.S. treasuries. Need money, sell treasuries. Ditto for the "Sovereign Wealth Funds" these same countries established in recent years. Again, U.S treasuries represent their most liquid holdings. They can sell 'em as needed, and boy do they need the cash they can get in exchange for their USTs.
Add to this a warning from these "Turks" of Wall Street:
Well, some day the bond bears will have their day. And that day may either be now or coming soon. In fact, based on the long-in-the-tooth bond bull market, you just know the clock's ticking. So the smart bet seems to be with the Turks, right? Except for the fact that we may be facing a brewing crisis, it certainly makes sense. But if that brewing crisis does come, the question we need to ask is: "Where will the big money go when it flees risk markets, most of all the stock market?" The only answer we have for the large amounts of money involved is US treasuries.
So unless you have a better idea, it looks like the Turk's frustration with Don Corleone refusing to die may be appropriate image to hold in our minds as we look at the body of US treasuries out there. They may be taking some shots, but they may still refuse to die.
Setting aside the colorful cinematic reference, it comes down to this: “No one” wants to buy treasuries, never mind the long treasury, even though they continue to provide a safe haven. "Everyone" knows it's foolish to buy treasuries. With their low yields, they can "only go down." It's not like when the 10-Year yielded 5% and crashed to 2%. You could make money on that trade. But now that they're at 2%, where can they go? As for the 30-Year, it's in even worse shape. After hitting an all-time low of 2.22% yield early 2015, it's been downhill ever since.
But it's not just recent price action. The bond bull market that began in 1982 has no more legs. How could it? It's old, feeble, an accident waiting to happen. And just look at the U.S. government's financial picture. Debt piled on top of debt. The government's "insolvent" - another accident waiting to happen. Why would you want to own government debt?
And there's more: China and other Emerging Market countries hold trillions of the USTs. They're selling like crazy as their markets and economies continue collapsing. They need money, and the most liquid securities held by their Central Banks include U.S. treasuries. Need money, sell treasuries. Ditto for the "Sovereign Wealth Funds" these same countries established in recent years. Again, U.S treasuries represent their most liquid holdings. They can sell 'em as needed, and boy do they need the cash they can get in exchange for their USTs.
Add to this a warning from these "Turks" of Wall Street:
Goldman Sachs Group Inc. and Pacific Investment Management Co. say bonds are poised to fall and traders aren’t prepared for how far the Federal Reserve will raise interest rates.Taking nothing away from those Turks of Wall Street, we still must remind ourselves that this sort of chatter has been been echoing in the financial media for years. Indeed, with the 30-year treasury bond yield having hit an all-time low of 2.22% about one year ago, the case was stronger than ever that you don't want bonds in your portfolio. And yet this year has seen another fall in yields and a commensurate rise in the price of US treasuries. What do we make of it?
“Ten-year yields are likely to go up,” Jan Hatzius, chief economist for Goldman Sachs, said at a conference in Sydney. The “bond market is underestimating to a significant degree the amount of monetary normalization that we’re likely to see.” The benchmark yield will rise to about 3 percent by year-end, he said, from 1.91 percent Thursday.
Well, some day the bond bears will have their day. And that day may either be now or coming soon. In fact, based on the long-in-the-tooth bond bull market, you just know the clock's ticking. So the smart bet seems to be with the Turks, right? Except for the fact that we may be facing a brewing crisis, it certainly makes sense. But if that brewing crisis does come, the question we need to ask is: "Where will the big money go when it flees risk markets, most of all the stock market?" The only answer we have for the large amounts of money involved is US treasuries.
So unless you have a better idea, it looks like the Turk's frustration with Don Corleone refusing to die may be appropriate image to hold in our minds as we look at the body of US treasuries out there. They may be taking some shots, but they may still refuse to die.
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