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> Falling U.S. Treasury yields were adding to pressure, she said, adding: “If U.S. Treasury (yields) were much higher... we would have been talking about a diff

by aazaa 5y ago

> Falling U.S. Treasury yields were adding to pressure, she said, adding: “If U.S. Treasury (yields) were much higher... we would have been talking about a different kind of level.” This is a global phenomenon. Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%. But it helps to zoom out. This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration. https://fred.stlouisfed.org/series/DGS30 https://fred.stlouisfed.org/series/DGS30 I challenge anyone to find a channel that long and that persistent (except for possibly the CPI). Keep following and you make the prediction of nominal 30-year yields touching zero within 3 years. Somebody is on the wrong side of this trade in a big way. Those who say the inflationary spike is temporary and will mean revert are buying bonds with wild abandon because once you break zero, you can always go deeper negative. And as yields fall, bond prices rise. Those who say we're on the road to permanent inflation and possibly more are looking for inflation hedges. The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast. It's also possible that both sides are wrong and what will actually happen will be unlike anything that has come before in terms of the ferocity and diversity of forces at work and ultimate pain/suffering. For right now, both extreme sides can point to data supporting their outlook. But for how long?

ren_engineer 5y ago
>The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast my guess would be people are putting that money into bitcoin
martincmartin 5y ago
> Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%. year-over-year CPI is backward looking: it compares one year ago to today. Treasury yields are forward looking: If I tie up money now, how much more will I get one year from now. Last year was pretty unusual. People expect the next year to be different.
rightbyte 5y ago
> Somebody is on the wrong side of this trade in a big way. My understanding is that banks get negative interest on deposits in the banking system over night from many European central banks. So if you pay say -0.x% on deposits then 1.85% over 30y is a bargain.
- second--shift 5y ago
  The fundamental problem with your hypothesis is the time-value of money: overnight deposits can be moved around, well, overnight, but a 30yr bond (for the bondholder, ignoring secondary markets) locks up capital for decades. A bondholder can't take advantage of future preferential interest rates when their capital is already locked up in low-yielding bonds. This is why bond price and bond yields have an inverse relationship.
hogFeast 5y ago
> Somebody is on the wrong side of this trade in a big way. The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it. Europe is one of the only markets where you really see this, yields in the US could certainly move higher or lower but they trade at a rational level. In Europe, the price is just wrong (because no-one is doing the trade to be right or wrong, they are doing the trade because of regulations). Also, making some kind of linear prediction for rates based on the drop over the last 40 years makes no sense. Rates are actually stationary, but the reason they have trended strongly over the past four decades is because of changes in inflation expectations and aging of society which has brought down the natural rate of interest significantly. Outside of this, the underlying properties of rates are stationary...the same as every other valuation measure.
- dragontamer 5y ago
  > The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it. Same in the USA. All bank deposits need to be balanced out with a certain number of US Treasury bonds / notes as a reserve. There are also huge institutions, such as the Social Security Trust Fund, who was forced to buy US Bonds from the 1980s through 2000s to prepare for the baby-boomer retirement cycle. So lots of groups are in fact, "forced" to own US Treasury bonds.
  - hogFeast 5y ago
    No, it isn't the same in the US. Reserves are vault cash plus deposits at the Fed. You cannot use USTs to count towards your reserves (and it wouldn't matter if you could, the reserve ratio isn't a binding monetary policy tool, excess reserves in the US banking system are close to $1trn). You are right that pension funds own a lot of bonds...this makes sense because there are very few long-dated securities that can be used to match liabilities...but the US pension fund system is relatively dynamic, and has a big allocation to alternatives. The European savings market is also totally different to the US: outside of govt bonds their financial markets are essentially non-existent relative to the US, lots of people save by putting their money into banks who then invest in govt bonds (the reasons for this are slightly complex, but loan demand in the US is relatively strong in the US, and non-existent in Europe so banks own a ton of govt bonds there), insurance sector is far larger (and Solvency II means govt bonds...lots of them), and there are more DB than DC schemes...so pension funds are far smaller proportionally (and the demand for non-bond assets is, typically, smaller). Pension funds are always going to own a lot of USTs but you just don't see the same pressure on US yields. Again though, don't take my word for it...look at the price. The Italian 10yr has traded under the US for the past five years or so...that clearly makes no sense.
UncleOxidant 5y ago
> Somebody is on the wrong side of this trade in a big way. There's an old adage that equity traders are the short-bus riders and bond traders are riding the long bus. I tend to think there's something to this and thus I tend to think the bond traders are more likely to be right here. > The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast. It's going into real estate.
- w4llstr33t 5y ago
  > It's going into real estate. Some of it is likely going to Bitcoin / crypto as well, even if not everyone agrees on the legitimacy of that space.
  - UncleOxidant 5y ago
    Some is going there too, but it's a much smaller piece of the pie. Real Estate also has utility - you can live in it. Gold's utility is much lower - sure you can make jewelry out of it's used in small amounts in electronics. Crypto basically has no utility.
    - w4llstr33t 5y ago
      > Crypto basically has no functionality. Transferring payments across the world is functional, and yes, the traditional financial system also does this, but it doesn't mean crypto has no functionality. Edit: Previous statement I was responding to has changed. I still don't agree that crypto has no utility though. I agree with almost everything I was responding to except that part. Yes, real estate has more utility, for sure. To me it doesn't matter that crypto has some overlap with traditional finance. This is an iteration on technology, which has its own pros/cons, but some folks are trying to come up with something better. Time will tell if that succeeds or not. IMO, it's too early to tell. You can also see that I wasn't the only person who responded to the parent comment that Bitcoin may be a competitor to capital flowing to gold as a potential inflation hedge.
      - 5y ago
cwkoss 5y ago
I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of people view Bitcoin as a viable inflation hedging alternative to gold. If Bitcoin didn't exist, I would probably own more gold.
- asdff 5y ago
  Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.
  - orthros 5y ago
    I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.
  - yaa_minu 5y ago
    Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.
    - candiodari 5y ago
      I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge. The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.
  - cwkoss 5y ago
quickthrowman 5y ago
One of the losers in the short bonds trade is Alphadyne, a hedge fund that lost 1.5B shorting bonds: https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1 https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1
throw0101a 5y ago
> This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration. Interest rates have been going down, at least in Western countries, with some gyrations, since 1310 AD: * https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018 https://www.bankofengland.co.uk/working-paper/2020/eight-cen... * https://www.visualcapitalist.com/the-history-of-interest-rates-over-670-years/ https://www.visualcapitalist.com/the-history-of-interest-rat...

by aazaa 5y ago

ren_engineer 5y ago

>The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast my guess would be people are putting that money into bitcoin

martincmartin 5y ago

> Real 30-year yields are steeply negative in the US as well, with nominal yield at 1.85% and year-over-year CPI above 5%. year-over-year CPI is backward looking: it compares one year ago to today. Treasury yields are forward looking: If I tie up money now, how much more will I get one year from now. Last year was pretty unusual. People expect the next year to be different.

rightbyte 5y ago

> Somebody is on the wrong side of this trade in a big way. My understanding is that banks get negative interest on deposits in the banking system over night from many European central banks. So if you pay say -0.x% on deposits then 1.85% over 30y is a bargain.

second--shift 5y ago
The fundamental problem with your hypothesis is the time-value of money: overnight deposits can be moved around, well, overnight, but a 30yr bond (for the bondholder, ignoring secondary markets) locks up capital for decades. A bondholder can't take advantage of future preferential interest rates when their capital is already locked up in low-yielding bonds. This is why bond price and bond yields have an inverse relationship.

hogFeast 5y ago

> Somebody is on the wrong side of this trade in a big way. The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it. Europe is one of the only markets where you really see this, yields in the US could certainly move higher or lower but they trade at a rational level. In Europe, the price is just wrong (because no-one is doing the trade to be right or wrong, they are doing the trade because of regulations). Also, making some kind of linear prediction for rates based on the drop over the last 40 years makes no sense. Rates are actually stationary, but the reason they have trended strongly over the past four decades is because of changes in inflation expectations and aging of society which has brought down the natural rate of interest significantly. Outside of this, the underlying properties of rates are stationary...the same as every other valuation measure.

dragontamer 5y ago
> The reason why European yields are so low is because financial institutions are forced to own govt bonds. That is it. Same in the USA. All bank deposits need to be balanced out with a certain number of US Treasury bonds / notes as a reserve. There are also huge institutions, such as the Social Security Trust Fund, who was forced to buy US Bonds from the 1980s through 2000s to prepare for the baby-boomer retirement cycle. So lots of groups are in fact, "forced" to own US Treasury bonds.
- hogFeast 5y ago
  No, it isn't the same in the US. Reserves are vault cash plus deposits at the Fed. You cannot use USTs to count towards your reserves (and it wouldn't matter if you could, the reserve ratio isn't a binding monetary policy tool, excess reserves in the US banking system are close to $1trn). You are right that pension funds own a lot of bonds...this makes sense because there are very few long-dated securities that can be used to match liabilities...but the US pension fund system is relatively dynamic, and has a big allocation to alternatives. The European savings market is also totally different to the US: outside of govt bonds their financial markets are essentially non-existent relative to the US, lots of people save by putting their money into banks who then invest in govt bonds (the reasons for this are slightly complex, but loan demand in the US is relatively strong in the US, and non-existent in Europe so banks own a ton of govt bonds there), insurance sector is far larger (and Solvency II means govt bonds...lots of them), and there are more DB than DC schemes...so pension funds are far smaller proportionally (and the demand for non-bond assets is, typically, smaller). Pension funds are always going to own a lot of USTs but you just don't see the same pressure on US yields. Again though, don't take my word for it...look at the price. The Italian 10yr has traded under the US for the past five years or so...that clearly makes no sense.

UncleOxidant 5y ago

> Somebody is on the wrong side of this trade in a big way. There's an old adage that equity traders are the short-bus riders and bond traders are riding the long bus. I tend to think there's something to this and thus I tend to think the bond traders are more likely to be right here. > The odd thing about this is that gold, the traditional inflation hedge has gone nowhere fast. It's going into real estate.

w4llstr33t 5y ago
> It's going into real estate. Some of it is likely going to Bitcoin / crypto as well, even if not everyone agrees on the legitimacy of that space.
- UncleOxidant 5y ago
  Some is going there too, but it's a much smaller piece of the pie. Real Estate also has utility - you can live in it. Gold's utility is much lower - sure you can make jewelry out of it's used in small amounts in electronics. Crypto basically has no utility.
  - w4llstr33t 5y ago
    > Crypto basically has no functionality. Transferring payments across the world is functional, and yes, the traditional financial system also does this, but it doesn't mean crypto has no functionality. Edit: Previous statement I was responding to has changed. I still don't agree that crypto has no utility though. I agree with almost everything I was responding to except that part. Yes, real estate has more utility, for sure. To me it doesn't matter that crypto has some overlap with traditional finance. This is an iteration on technology, which has its own pros/cons, but some folks are trying to come up with something better. Time will tell if that succeeds or not. IMO, it's too early to tell. You can also see that I wasn't the only person who responded to the parent comment that Bitcoin may be a competitor to capital flowing to gold as a potential inflation hedge.
    - 5y ago

cwkoss 5y ago

I use Bitcoin to satisfy my inflation-hedging appetite. I wonder to what extent cryptocurrency enthusiasm is suppressing gold prices, as increasing number of people view Bitcoin as a viable inflation hedging alternative to gold. If Bitcoin didn't exist, I would probably own more gold.

asdff 5y ago
Something that might move hundreds of percentage points in either direction in a given year seems like a poor hedge against inflation to me.
- orthros 5y ago
  I'll be the pedant to point out it can't move more than 100% on the downside. Which since it has risen more than 100% in less than a year seems like a decent deal although fraught with risk to be sure.
- yaa_minu 5y ago
  Yes, in the short term, neither gold nor even gold is a good hedge. Cash will always be superior in the short term unless we're in a hyperinflationary situation. However, on a long enough time scale, gold and bitcoin can function as great inflation hedges. I say this with a little bit of caution especially for bitcoin because it's only a few years old but we know for this short 12 year period that no one has lost money by holding bitcoin for more than 4 years.
  - candiodari 5y ago
    I think I'm against this argument, and instead present of Warren Buffet's. If you think gold is a good hedge against inflation, a consumer staple with a safe position (ie. Coca-Cola) is a better inflation hedge. The same argument would apply to a whole lot of companies in the "necessities" department. They provide every bit of inflation hedge value Gold provides, but also provide dividend and stock appreciation.
- cwkoss 5y ago

quickthrowman 5y ago

One of the losers in the short bonds trade is Alphadyne, a hedge fund that lost 1.5B shorting bonds: https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1 https://www.streetinsider.com/dr/news.php?id=18762011&gfv=1

throw0101a 5y ago

> This is part of a multi-decade trend in ever lower 30-year yields stretching back to the Regan administration. Interest rates have been going down, at least in Western countries, with some gyrations, since 1310 AD: * https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018 https://www.bankofengland.co.uk/working-paper/2020/eight-cen... * https://www.visualcapitalist.com/the-history-of-interest-rates-over-670-years/ https://www.visualcapitalist.com/the-history-of-interest-rat...