Who would have thought that you could stow cash away in a safer equivalent (1-3 year US Treasury bonds), keep your principal, add asset value and get monthly income? Well that’s what my primary cash ‘equiv.’ is doing now that the bull fantasy of organic economic growth seems to be coming unglued or is at least getting a righteous adjustment. Of course the likes of SHY could eventually be secondary to a certain pretty, heavy and much reviled elemental relic in this atmosphere.
Since we noted a couple weeks ago that the TIP fund was trying to put in a short-term bottom, it ground around but continued upward. Of course, with the smell of risk ‘off’ in the air, TLT has gone up even better lately.
What I find pretty cool is the inverse nature of TIP-TLT and USD (UUP) in the lower panels. We are still on the potential ‘inflation trade’ (anti-USD) bounce theme but it is safe to say that for it to get going, TIP-TLT would need start climbing. I have some TIP and STIP to go along with SHY as part of my ‘cash equiv.’ but think of it more as an indicator.
I sold all of my longer term Treasury bonds at the first level of support in anticipation of this bounce in yields. The bonds had returned some good principle gains along with a month or two of dividends. I am wondering now if the bounce in yields is finishing up and maybe the bonds might be favorable again.
So we have this big party atmosphere, spurred on by Mr. Draghi and the omnipresent US disgrace called ZIRP. But for a day at least, players are looking like they are risk ‘OFF’ when viewed through the bond market’s lens.
Not only are yields down (T bonds up), but the 2 year yield is down heartily. Normally a stock market pump sucks them right out of the short end and into risk markets. The curve is rising as rates drop.
As I said in the previous post, this year is gonna be interesting. In fact, it already is; very much so.
The following is one of a wide range of analytical topics covered in NFTRH 293’s 35 pages this week, much of which is straight ahead technical analysis. But the T Bond market is usually central to an overall macro view at any given time. This segment is not meant to provide actionable direction (other than perhaps to prepare for a potential rise in T bonds yields), it is meant to dig into the mechanics beneath the financial markets in an effort to have people consider that there is much more going on with markets than simple nominal TA or conventional fundamental analysis (PE ratios, growth metrics, reported economic data, etc.) can account for.
US Treasury Bonds
Yields on long-term Treasuries have continued to decline in line with our view that was contrary the ‘Great Rotation’ (out of bonds) hype. The [30-year] especially is now close to support and the next play seems like it could be rising yields and declining T bonds.
The 30-year ‘Continuum’ view above makes the simple case that players had to be put offside believing in the ‘Great Rotation’ at 4% yields. The nearly half-year decline since then has now satisfied the chart as yields have come to our 3.1% to 3.2% target range, where there is support.
Today the yield curve rises again as short term yields decline faster, with the implication by today’s snapshot being that players are on a little risk ‘OFF’ twitch. It’s just another single day in a vacuum here in the casino, but its implication – if one were to extrapolate – is gold positive. From Bloomberg…
Some points of interest…
An inherent level of systemic risk? Most people intuitively feel Karl Popper’s observation that: “In an economic system, if the goal of the authorities is to reduce some particular risks, then the sum of all these suppressed risks will reappear one day through a massive increase in the systemic risk and this will happen because the future is unknowable”. In other words, suppress risk somewhere and it comes back with a vengeance to bite you on the derriere at some later date. Look at 2008 as an example: we cut up credit-issuing risk into tiny parcels and distributed it across the system through securitization, only to see the banks take on a lot more leverage and ultimately sink their balance sheets on instruments they failed to understand. Hyman Minsky summed up this inherent contradiction well when he stated that “stability breeds instability”. In other words, the more stable a thing is, the temptation rises to pile on leverage, which makes that “something” more unstable on the back end.
This is the whole point, that it is permissive policy that instigates bad financial behavior (encourages ever riskier speculative activity), not that the policy itself is the culprit where the inevitable unwinding (the bust side of the boom-bust equation) of speculation is concerned.
The notion of Anti-Fragile: the above brings us to the Nassim Taleb notion of “anti-fragile”: just as a parent who overly cocoons a child prepares that offspring poorly to function in the wider world, so policy-makers intent on cushioning the private sector from every shock in the economic cycle are doing the overall system a massive disservice. By preventing the build-up of immunity, or the ability to thrive in crises (i.e., anti-fragility), policymakers sow the seed for a greater crisis down the road (hence the repeated cycle of crises).
Safe in Daddy’s arms since 2008 and now coddled and nurtured by Mommy. There are supposedly serious commentators out there loudly lauding the idea that Ben Bernanke saved the financial system. Well, he and now she are doing it again. But the root elements are the same as what Greenspan did early last decade. They have simply offloaded risk from speculators to a bond market (in this case Treasuries vs. various commercial credit vehicles in the last cycle). Either way, the goal is risk ‘ON’ (and it is).
Lay the blame on zero interest-rate policy (ZIRP): following on the above, not only does ZIRP allow the survival of zombie companies (which drags down the returns for everyone) but it most certainly affects investors’ behavior. Firstly, by encouraging banks to play the yield curve and buy long bonds, rather than go out and lend. Secondly, because almost all investors hold part of their assets in equities and part in cash or fixed incomes. And in a world in which fixed income instruments yield close to nothing, the tolerance for pain in other asset classes probably diminishes all the more.
In other words, get out of savings and into assets. But when the inevitable corrections come in asset markets there is little income to be found in fixed income. If Grandma gets chewed up and spit out in the process? So be it I guess.
The casino is in operation day after day, week after week… yield curve up, yield curve down… markets up, markets down. Wax is on today and the yield curve is down. Funny how it was up yesterday with declining yields and it is down today with rising yields. Hey, it’s all good and it all makes sense in the casino that Bernanke built (or rebuilt after Greenspan’s fell apart).