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Not the usual story you see on HN... but it's still interesting - if the trading of US debt is the kind of thing that gets you going. That said, it does get me
by module0000 9y ago
Not the usual story you see on HN... but it's still interesting - if the trading of US debt is the kind of thing that gets you going.
That said, it does get me going. What this story is telling you is:
1) Futures on US treasury bonds are going to fall, as the DOT unloads 42 million of them. This is a lot, and it will affect the value of your investments/401k in a non-trivial way.
2) Equities(and futures based on them, e.g. ES/NQ/DJIA) are going to rise, simply due to their inverse relationship with treasury bonds.
3) Commodities(such as oil, gasoline, natural gas) will increase in price.
4) Foreign interests will have a "fire sale" of US debt available to them for purchase. Whether or not they will buy it is anyone's guess. I'd say "if you know, you should tell us!", but we all know that won't happen.
What does this mean for the average investor? Short on bonds, long on equities. Your 401k or other managed investment portfolio is likely taking this approach on your behalf anyway(if they aren't, fire them and find one that does).
Edit: If you want to know what these particular financial instruments are and how they work(bonds and how they are traded), see here: https://www.cmegroup.com/education/files/understanding-treasury-futures.pdf https://www.cmegroup.com/education/files/understanding-treas...
- toomuchtodo 9y agoCan equities continue to rise in price? They already seem overpriced at current P/E valuations, disconnected from fundamentals.
- module0000 9y agoEvery time I find myself thinking "these are too high...", that's when my short stops start getting hit. When we talk about the equity indices at work, we have been referring to them as "defying reality" for the last 6 months. Just my 2 cents, but I think they are a huge bubble, and at some point they've got to pop. I wish I had the equity for a very-long-term short, but unfortunately I don't.
- deleted 9y ago[deleted]
- ThrustVectoring 9y agoRun a barbell strategy with short-term bonds and equity put options (slightly OTM). The convexity helps you out here - you're far more exposed to downward price movements than upwards.
- danmaz74 9y agoUnfortunately, "the market can remain irrational longer than you can remain solvent"
- johnm1019 9y agoWill this affect only US govt bonds or corporate bonds too?
- hkmurakami 9y agoCorporate bond yield is correlated to treasury bond yields, so the answer yes that it will affect corporate bonds as well.
- gd1 9y agoJesus Christ. The fed aren't offloading anything, they just won't be reinvesting when existing bonds mature (roll off the balance sheet). And inverse correlation between stocks and bonds isn't some law of nature.
- X86BSD 9y agoLong gold and silver!
- linkregister 9y agoIs the Treasury Department selling the bonds or is the Federal Reserve? Wasn't the action being taken in the article simply a cap on the amount of reinvested bonds? Doesn't that lead to a gradual decrease in purchases of mature bonds rather than a "fire sale"? I'm not challenging your position, I am just seeing a terminology mismatch between your comment and the content of the article. I, a financial layperson, am likely not the intended audience of the article, which appears to be targeted toward economists or otherwise well-informed readers.
- the_dude33 9y agoThat logic doesn't hold. Look at the relationship between bonds and equities. You're saying that in "1) futures on bonds will fall.." which will cause "2) equities to rise" - well, historically yields have moved inversely to stocks but that hasnt always been the case - see http://www.marketwatch.com/story/the-disconnect-between-stocks-and-bonds-in-one-chart-2017-02-27 http://www.marketwatch.com/story/the-disconnect-between-stoc... All else being equal, rates going up will increase the value of the US dollar. If most US companies derive a majority of their revenue overseas, will that be good for US equities? And that's just one consideration. Point is,from a trading perspective, it's generally not helpful to make blanket assumptions as the market can stay irrational far longer than most think.
- drunkpotato 9y agoIs it possible that bonds and equities both lose value?
- hkmurakami 9y agoYes, esp since over the last decade we saw a bull market in both bonds and equities, where the equity market was arguably driven by loose monetary policy. If the equity markets were buoyed significantly by policy, then unwinding this would have the inverse effect.
- AlexCoventry 9y agoYou could maybe see the fed funds rate rising through the early naughties, followed by the Great Recession, as an example of that.
- duxup 9y agoI'm not saying you're wrong, but if this is all that predictable... wouldn't the market already expect and reacted to this to some extent? Also wouldn't it be pretty easy to make some money off of these oh so sure events? In fairness I'm always wondering this when folks predict such things.
- mkrum 9y agoWhat he said was correct, its more a comment on the fundamental relationships than a prediction. The only thing that is priced in is the expectation of what is going to happen. No one knew for sure what the FED would do or when.
- ngsayjoe 9y agoYou mean 42 trillion?
- Gustomaximus 9y agoIm assuming these bonds are in $10k amounts. Edit: I looked it up and T-Bonds start at $1k
- module0000 9y agoThe bonds I'm talking about are(mainly) 30yr and 30yr ultra bonds, they have a face value of 100k. The other bonds will be in the mix also, but the lion share will(IMO) be 100k. A disclaimer to all this... this is what I observe day in and day out trading bonds for a living. It doesn't mean that's what is going to happen, this is just what I've seen in the past.
- shostack 9y agoAny thoughts on the impact to housing, and particular the Bay Area's crazy market?
- ac29 9y ago>1) Futures on US treasury bonds are going to fall, as the DOT unloads 42 million of them. This is a lot, and it will affect the value of your investments/401k in a non-trivial way. I think its important to note that the Fed is not going to start selling their holdings, they are going to stop reinvesting the proceeds as much (they haven't bought any additional assets since 2014, reinvestment aside). This should have a much more muted effect on the market -- letting a ~1%/month of bond assets mature without reinvestment is not the same as selling 1%/month. >4) Foreign interests will have a "fire sale" of US debt available to them for purchase. Again, the Fed isn't selling anything. They are partially curtailing demand by reducing reinvestment which will likely affect bond prices and yields, but not nearly as dramatically as selling them pre-term.
- prostoalex 9y ago> Commodities(such as oil, gasoline, natural gas) will increase in price. How so? QE was heralded by critics as printing new money, leading to a price boost in equities and commodities since the money had to go somewhere in search of yield. Wouldn't the opposite of QE decrease the supply of readily available USD, so the suppliers with a glut of a certain commodity are then forced to compete for whatever cash is left?
- gregw134 9y agoDoes it make sense that equities would fall? It seems to me that interest rates on bonds should rise as the Fed adds to the supply of bonds, which should cause less investment in equities as bonds become more attractive.
- Gustomaximus 9y agoEquities are currently inflated by cheap and accessible debt alongside a low expected yield. Id say unwinding is more likely to bring a reverse in equity pricing. Reasonable odds of a sharp one. And why point 3? Is this from expected currency devaluation?
- deleted 9y ago[deleted]
- jimmyswimmy 9y agoYour point two is not absolutely correct. Falling bond yields do not inherently cause a rise in stock process "simply because of their inverse relationship." For one thing, this could further depress the value of the dollar and drove capital away from the US, hurting bonds and equities alike.