First of all, I have had to re-think why the Ten Yr and 30 year bond yields keep falling like they did roughly this same time last year, despite a very aggressive pipeline of stimulus around the world compared to last year at this time and with stock markets rising, not following….and I believe a different dynamic is now at work.
In my post yesterday about the Asian Tigers, I made comment about the Fed policy of low s.t. interest rates is fueling the dollar carry trade in such a way that many foreign banks are buying up the $ in order to keep it from free-falling…in turn, they have to invest this money somewhere, and the best place, and among the safest places in invest it is in longer dated US treasuries.
Here were the key comments related to your question as I replied yesterday at 1 PM:
“Incidentally, I believe that our Fed wants Japan to buy $, and for other nations like China to do the same…Bernanke doesn’t have to lift a finger to raise rates so long as our chief exporters are willing to do the lifting for us by buying up our currency to remove it from the world monetary system…and then, these nations turn around and buy our Treasuries because they have to do something with all those dollars! …and thus, our treasuries stay relatively low in yields which keeps things like mortgages relatively low over here…at least for now, it’s the opposite of what many inflation worriers are predicting which is an exploding bond yield and a monstrous return of inflation…perhaps these things will occur as a result of a bubble, but for the moment, the Bernanke put is working just fine, thank you!
“Further to my point, the Fed’s policy low interest rate policy has been to slow the hemorrhaging of the US balance of trade…and to strengthen our exports…this will take time, and gradually, Bernanke will be compelled to raise our rates, but I believe he is waiting for other nations to raise their rates first…notice Australia has raised its rates twice already…India is said to be prepared to do the same…the European Union is preparing to do the same…and Obama’s team, though publicly talking about a strong $ (to save face), will quietly be pressuring China to end its peg to the $ or at least allow a re-jigger of the peg.
“The US will lag the rest of the world in raising rates, so long as Bernanke can carry out his plan without panic of new bubbles or collapse of foreign economies which have relied too much on exports to the US these many years…also, this is a good reason to favor the Dow as the best index going forward of the American major indexes, because the Dow is made up of multi-national companies which derive much of their business from beyond our shores.
“Good trades to you, Ace”
If this is so, then we need to re-think what happens when we suffer a pullback…will money automatically rush into treasuries?…My current thinking is that it will not rush into the long bonds, but rather into short term bonds such as 3 month and 2 year t-bills.
It will require further observations, but this is what I am thinking currently. Ace