Monday, August 19, 2013

Three cheers for higher yields

10-yr Treasury yields are up 130 bps from their all-time lows, and that's absolutely great news. Yields are not up because the market is worried about a tapering of Quantitative Easing. Yields are up because both the market and the Fed realize that the economic fundamentals are improving. Remember how 10-yr yields soared from late 2009 through early 2010, despite the Fed's first round of QE? That wasn't the death of the economy, that was the signal that the economy had recovered. Higher yields naturally accompany stronger growth. If the economy really does pick up some speed, 10-yr yields are likely to move even higher, probably to 3.5% or even 4%. 

The rise in real yields is the key, since they tend to track the underlying growth potential of the economy. Real yields are up and gold is down, and those moves point to a stronger economy with less uncertainty. They both reflect a decline in the world's demand for safe assets, and that is happening because uncertainty is declining. With confidence beginning to return, we should see stronger economic growth emerge over the next year or two.


theyenguy said...

Yes indeed three cheers for higher interest rates, this is very good news for all Chrisitans, as the world has passed decisively from Liberalism into Authoritarianism, and this means that Christ's Kindom of Heaven on Earth, after the Tribulation and Great Tribulation, is now one day more significantly closer.

The story of the day is that the Interest rate on the US Ten Year Note rose to 2.88%. It was three more tears for those invested in US 30 Year Bonds, EDV, and 10 Year US Government Notes, TLT.

Indonesia Banks, BBRI, BBCA, BMRI, BBNI, India Bank, IBN, and The National Bank of Greece, NBG, led all forms of fiat money lower.

World Stocks, VT, Nation Investment, EFA, Credit, AGG, Major World Currencies, DBV, and Emerging Market Currencies, CEW, all traded lower, as the Interest Rate on the US Ten Year Note, ^TNX, rose to 2.88%.

Sectors trading lower included

Solar, TAN, -3.2, led lower by CSUN, MOSY, SUPX,

Home Building, ITB -3.1

200% Inverse Volatility, XIV -2.7

Energy Production, XOP -2.0, led lower by MRO, CIE

Energy, XLE -1.7

US Infrastructure, PKB, -1.6, led lower by PGTI, TREX, MAS, USG, AMWD, BECN, IP, LPX

Yield bearing sectors trading lower included

Mortgage REITS, REM -4.3

Industrial Office REITS, FNIO -3.7

Small Cap Real Estate, ROOF -2.5

Premium REITS, KBWY -1.7

Ultra Junk Bonds, UJB -1.7

Global Utilities, DBU -1.6

Mining sectors trading lower included

Global Miners, PICK -3.6

Silver Miners, -2.8

Coal Miners, KOL -2.6

Metal Mining, XME -2.5

Gold Miners, GDX -1.7

Copper Miners, COPX -1.6

Financial sectors trading lower included

Emerging Market Financials, EMFN -2.1

European Financials, EUFN -1.5

Investment Bankers, KCE -1.5

Too Big To Fail Bankers, RWW -1.1

Global Financials, IXG -1.0

Countries trading lower included

Indonisia, EIDO -7.4

Greece, GREK -5.3

India Small Caps, SCIN -5.2

Thailand, THD -5.1

India, INP -4.5

Turkey, TUR -3.6

Philippines, EPHE -3.1

Italy, EWI -3.0

Spain, EWP -2.6

Yields are up because investors are aware that the world central banks monetary policies have crossed the Rubicon of sound monetary policy and have turned “money good investments” bad, and are no longer able to stimulate global growth and trade, nor corporate profitablity.

It was onn May 24, 2013, Jesus Christ, operating at the helm of the economy of God, Ephesians 1:10, enabled the bond vigilantes to call the interest rate on the US Government Note, ^TNX, higher to 2.01%, making for an extinction event that terminated Emerging Market Investment, EEM, and Utility Stock Investment, XLU. The rise of the interest rate on August 13 2013, to 2.71%, constituted an “apocalyptic event” that has terminated fiat money.

And today's trade lower in all forms of fiat wealth, simply puts the nails in the coffin for the death and burial of Liberalism.

With the failure of credit on August 13, 2013, both the sovereignty of democratic nation states, (this being seen in World Treasury Bonds, BWX, collapsing in value), and the seigniorage of the world central banks, has failed. Jesus Christ, has pivoted the world’s economic and political paradigm from Liberalism to Authoritarianism.

From August 13, 2013, forward, regional nannycrats will set the rules for the formation of the new money, that being diktat money, which will determine everything else.

Benjamin Cole said...

Kudos to Scott Grannis' optimism, and I hope he is right.

Not sure about QE---its effect might be to raise yields, as investors become more optimistic that QE will stimulate the economy.

Certainly, the DJIA does not like "tapering down."

My fear is that the Fed has been too timid, and will stay too timid, in regards to the use of QE.

We still have this mindset: If the Fed tightens that is normal. If the Fed stimulates, that is "activist" and "artificial."

Of course, tightening is just as activist as stimulus, but the Fed is operated by central bankers, and they have a squeamish aversion to prosperity.

William said...

Investors in longer dated bond mutual funds have nothing to cheer about. Here are some examples of returns year-to-date at Vanguard:

Intermediate investment grade - 3.52%
Intermediate Tax Exempt - 3.74%

Long term investment grade - 9.64%

Long term tax exempt - 5.45%

Long term treasuries - 13.21%

Inflation-protected securities - 9.10%

It's beginning to look like 1994.

Anonymous said...

I'm 38, 15% bond funds and 85% equity - roughly 23% international equity in my 401K. My preference is to buy assets when they have fallen in price (contrarian) like in 2008 and 2009 I was loading up on stocks when there was the proverbial "blood in the streets."

And I have been buying all stocks through out this recovery/expansion and bull market.

Scott has helped me understand in more detail how to watch economic and market data to better understand and "find evidence" for the mood of the market and the fundamentals of the strength of the economy.


Now I am looking to buy more bonds (total bond index funds, not individual bond classes) because they have fallen in price. But am in no rush, although my plan was to probably increase my 401K bond allocation to 20% around the age of 40.

I would not in the least bit hold anyone's opinion hostage because I know that no one owns a perfect divining rod..

But, for discussion, if anyone's willing to share-

What are your thoughts on when to start buying more total bond market funds? Is the bond market "pessimistic enough" for a contrarion to step in and buy what others are selling?

Scott? Anyone?

Hans said...

Enguy, Jesus can only save your soul, but Bank Bernank can make you well off.

William, nice stats!

Scott Grannis is correct that indeed most of the QEs have had little to no impact on 10 or 30 year rates, as the damage was already done with FedZero.

Omicus, now is not the time to purchase any bond fund, even the VBMFX, is off by 6% since May of this year...

Anything out over ninety days will see a drawdown...

Benjamin Cole said...

Tough right now. The Fed is fixated on inflation. That is bad for stocks property. But bonds do not have much upside.

You may want to lock in your gains.

William said...

Oeconomicus said..."What are your thoughts on when to start buying more total bond market funds?"

Well, bonds have just completed a 32 year bull market. They shall enter a prolonged bear market, maybe 15 - 18 years.Just as in an equity bear market one must be a trader to make money.

The idea would be to buy bonds for short term when they are "over sold" and sell them when they are "over bought". Personally, I am not a technical trader so I wouldn't know how to do that in bonds any more than I would in equities.

I certainly would wait until after the Federal Reserve has truly entered its tightening cycle when it begin to raise the Federal Funds Rate which is a few year away.

Unfortunately, given the extreme popularity of bonds and their extremely low bond yields of the past 4 years, many, many naive investors will prematurely buy bond funds over the nest 15 years thinking that they are at a bottom and a good a buy.

You should think in terms of waiting 15 years until - like in the late 1970s - investment writers are once again declaring that "bonds are instruments of guaranteed confiscation" and when they are totally washed out and no one want them including - perversely -YOU. Buy bonds when you hate them!!