Disclaimer

Disclaimer. After nearly 40 years managing money for some of the largest life offices and investment managers in the world, I think I have something to offer. These days I'm retired, and I can't by law give you advice. I do make mistakes, but I try hard to do my analysis thoroughly, and to make sure my data are correct. Remember: the unexpected sometimes happens. The expected does too, but all too often it takes longer than you thought it would.

The Goddess of Markets punishes (eventually) greed, folly, laziness and arrogance. No matter how many years you've served Her. Take care. Be humble. And don't blame me.

BTW, clicking on most charts will produce the original-sized, i.e., bigger version.

Wednesday, January 8, 2014

Treasury sell off


It's tempting to believe that if bonds are selling off, so should equities.  But it depends why they are being sold.  If, for example, they're being sold because the government is in strife, currency is fleeing the country, etc, then both markets should sell off together.  But if they are selling off because bond yields (remember, a rise in yield = a fall in price; the chart on the left shows the yield on 10 year US Treasury bonds) are reverting to "normal" because the risk of recession has diminished, then bonds may sell off while equities advance.

The ending of QE (quantitative easing) exacerbates this dynamic.  QE was introduced to prevent depression, which duly happened, and now that the economy is once again on a path of sustained growth, QE is no longer needed.  Since QE involved the Fed buying long-dated bonds, the phased withdrawal ("tapering") of this massive buyer has inevitably led to a bond sell off.

There is a risk for shares, and that is that the rise fixed rate mortgages as a response to the rise bond yields will cause the economy to slow, since housing is such a significant swing factor.  One to watch, for us and the Fed.

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