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@Bee My two cents' worth: 1. Yes 2. It depends on whether growth and inflation in the US accelerate enough to compensate for QE and sluggish growth abroad. In Ted's link, there was this link with a pretty good summary of the bear case on LT bonds: http://business.financialpost.com/2014/11/19/bond-markets-to-get-rude-awakening-in-2015-cibc/ That said, I don't know who's right, and with so many people calling for LT bonds to fall, it certainly would be a contrarian trade to bet on their continued appreciation.
That said, I don't know who's right, and with so many people calling for LT bonds to fall, it certainly would be a contrarian trade to bet on their continued appreciation.
Thanks for the article.
Here's my take...help me if I'm missing something: QE in other countries creates an incentive to borrow this newly printed money at near zero percent. Investors borrow at these low interest rates and some of this QE arrives on our shores looking for a better rate. Foreign QE buys US bonds paying 1- 4% depending on the duration. All this buying helps to continue lowering the bond yields on US bonds and creates the opportunity for capital appreciation in older higher yielding bonds.
@Bee, I'm just playing devil's advocate here, I know you've done very well with your LT Tsy investments, that was a great call, and because of you I intend at some point to buy EDV to hedge my stock market investment, but here is a possible other scenario: 1. Since the movement you describe has been widely trumpeted, it is maybe already priced in to current bond prices, and any surprise (say, an acceleration of growth in the Eurozone, an agreement by Germany to loosen fiscal policy, etc.) will send prices falling 2. The US economy hits lift off mode, but Yellen keeps to her promise to stay dovish for too long, so LT interest rates start rising with inflation fears: a Eurozone bond paying 1.5% when inflation there is 1% may appear more attractive than a US Tsy paying 2.5% when traders fear inflation in the US will hit 3%.
I'm not predicting this scenario, I've realized I'm not smart enough to time the bond market, but it's possible, no?
A little overdone on the headline,but an issue to contemplate: Fund boards, management go on high alert around bond liquidity BY JESSICA TOONKEL Reuters.com NEW YORK Mon Nov 24, 2014 1:05am EST The concern is this: As the Federal Reserve begins to raise rates, which many expect will begin to happen next year, investors will rush to sell bonds as their value drops in a rising interest rate environment. Historically Wall Street banks have been the buyers of these bonds, but regulations and capital requirements imposed since the financial crisis have forced these firms to slash their inventories.
"I look around and ask 'at the end of the day how easy would it be to sell what I own?', and the answer is it is much more challenging," said Jason Brady, a fixed income portfolio manager at Sante Fe, New Mexico-based Thornburg Investment Management, which has $70 billion in assets under management, $17 billion of which is in fixed income.
In the end, however, the best way managers can get comfortable with liquidity concerns is to be prepared to hold on to the bonds in their portfolio for the long-term, said Margie Patel, senior portfolio manager at Wells Capital Management, speaking Thursday at the Reuters summit.
"Liquidity is illusory for most bonds," she said. "The only time you need it is when you can't get it."
Comments
1. Doesn't more QE (from ECB, Japan, and China...etc) act to push interest rates even lower globally?
2. Until QE ends, shouldn't LT bond funds continue to appreciate in price?
My two cents' worth:
1. Yes
2. It depends on whether growth and inflation in the US accelerate enough to compensate for QE and sluggish growth abroad.
In Ted's link, there was this link with a pretty good summary of the bear case on LT bonds: http://business.financialpost.com/2014/11/19/bond-markets-to-get-rude-awakening-in-2015-cibc/
That said, I don't know who's right, and with so many people calling for LT bonds to fall, it certainly would be a contrarian trade to bet on their continued appreciation.
Here's my take...help me if I'm missing something:
QE in other countries creates an incentive to borrow this newly printed money at near zero percent. Investors borrow at these low interest rates and some of this QE arrives on our shores looking for a better rate. Foreign QE buys US bonds paying 1- 4% depending on the duration. All this buying helps to continue lowering the bond yields on US bonds and creates the opportunity for capital appreciation in older higher yielding bonds.
I'm just playing devil's advocate here, I know you've done very well with your LT Tsy investments, that was a great call, and because of you I intend at some point to buy EDV to hedge my stock market investment, but here is a possible other scenario:
1. Since the movement you describe has been widely trumpeted, it is maybe already priced in to current bond prices, and any surprise (say, an acceleration of growth in the Eurozone, an agreement by Germany to loosen fiscal policy, etc.) will send prices falling
2. The US economy hits lift off mode, but Yellen keeps to her promise to stay dovish for too long, so LT interest rates start rising with inflation fears: a Eurozone bond paying 1.5% when inflation there is 1% may appear more attractive than a US Tsy paying 2.5% when traders fear inflation in the US will hit 3%.
I'm not predicting this scenario, I've realized I'm not smart enough to time the bond market, but it's possible, no?
Fund boards, management go on high alert around bond liquidity
BY JESSICA TOONKEL Reuters.com
NEW YORK Mon Nov 24, 2014 1:05am EST
The concern is this: As the Federal Reserve begins to raise rates, which many expect will begin to happen next year, investors will rush to sell bonds as their value drops in a rising interest rate environment. Historically Wall Street banks have been the buyers of these bonds, but regulations and capital requirements imposed since the financial crisis have forced these firms to slash their inventories.
"I look around and ask 'at the end of the day how easy would it be to sell what I own?', and the answer is it is much more challenging," said Jason Brady, a fixed income portfolio manager at Sante Fe, New Mexico-based Thornburg Investment Management, which has $70 billion in assets under management, $17 billion of which is in fixed income.
In the end, however, the best way managers can get comfortable with liquidity concerns is to be prepared to hold on to the bonds in their portfolio for the long-term, said Margie Patel, senior portfolio manager at Wells Capital Management, speaking Thursday at the Reuters summit.
"Liquidity is illusory for most bonds," she said. "The only time you need it is when you can't get it."
http://www.reuters.com/article/2014/11/24/funds-bondholders-alert-idUSL2N0TA1CH20141124