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February 22, 2006

Bond yield conundrum, Wed., Feb. 22, 2006, 5:48 PM

Very early this morning, I said I thought yields on the 30-year U.S. Treasury Bond would dip below 4.50. That they did. They opened at 4.54 and closed at 4.484 for another big day in the U.S. bond market.

So, now the 30-year bonds are yielding the same as 6-month T-Bills.


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Is this the bond market saying that the economy has no inflation (dubious from the data this morning, which is the fastest growth in 4 months) or that the economy is going to die (dubious given that GDP is likely cranking on at least six cylinders)? Is it traders fleeing equities in favor of bonds (dubious with today's rally to almost 5 year highs)?

I could go on but the truth is I don't have a clue.

I don't know why the bond market started the day on wheels today, just like the 10th and 17th of the month.

But I figure somebody knows.

Posted by Posted by Bill Cara on February 22, 2006 05:48:35 PM | Category: Bonds

Discourse

I own bonds for the disinflation/deflation benefit.

But, I also own gold and energy.

What asset class will do well with a credit bubble burst?

Posted by: g034 [TypeKey Profile Page] at February 22, 2006 6:02 PM [link]

Posted by: Andy [TypeKey Profile Page] at February 22, 2006 6:08 PM [link]

Lite explanation of POMO's
http://en.wikipedia.org/wiki/Open_market_operations

Andrew

Posted by: Andy [TypeKey Profile Page] at February 22, 2006 6:17 PM [link]

http://www.bullandbearwise.com/FOMOOutChart.asp

As the global (read Asian) GDP boom continues, the fear is that global money will pour out of the US and back into Asia. US markets will tank. Thus, we have a vested interest in slowing the Asian locomotive -- and the only way THAT can be done is by engineering a soft landing in the US -- by gradually raising short rates. The long end is anticipating that, perhaps. Just a guess.

Posted by: AT [TypeKey Profile Page] at February 22, 2006 8:21 PM [link]

I hold a 5% position in long dated strips, cheap insurance in event of a real blow up. However sentiment is highest since 2003 (Rydex Bond BB 20 dma) and appears to be leveling off (turn?)here.

Other than the higher prices I don't see much convincing evidence that the outlook for bonds is fundamentally the best in 2-3 years. Given that, from a trading perspective they would appear to be a bad bet here.

There is a camp that sees oil as a drag on the economy and therefore strength there is bullish for bonds. I can see some merit in that, but with big energy now out of favor (negative extreme sentiment) they would appear a better risk / return than bonds.

If the U.S. continues to act in a protectionist fashion our international lenders (China, OPEC, etc.) may have to send a message to Congress... no ownership, no more extension of credit.

"The borrower shall be a slave to the lender."

Posted by: stockman [TypeKey Profile Page] at February 23, 2006 6:02 AM [link]

I now hold a 20% position in treasuries, TIPs, a smattering of high yield utilities and commercial REITs for diversification. Will this be beneficial to my returns? I don't know. In combination with PM shares, I hope that it gives me some counterbalance for the portfolio. My timing here is probably awful PER USUAL. Trade againtst me, not with me is the best strategy. :)

Posted by: MarkM [TypeKey Profile Page] at February 23, 2006 8:28 AM [link]