30 year US Treasury yields have gradually fallen from 12% in the early 80s to 2.5% now. It’s very unlikely they’ll return to 12% by the end of the year. In your opinion, what’s the maximum rate increase we can expect by year end?
4%. Somewhat counterintuitively I think longer end rates will go higher if the fed doesn’t raise rates than if they do.
If I had to go long or short the US 30yr today, I’d go long (as long as I was allowed to exit the trade in a year or so).
I think the rates are gonna stay down here for quite a while. But if it is going to go up, ~4 % would also be my target rate.
How can US 30yr Treasuries go to 4% with Europe and Japan printing like crazy? Is everyone going to sell off their Treasuries for negative yielding bunds? No. Just no. The US will be importing European deflation, and therefore maintain lower for longer, for a considerable time. I wouldn’t be surprised if the first rate hike is in late 2016.
^ This.
Long dated treasury yields will still go up a bit if the Fed raises rates. It will be harder to borrow short dated to buy long dated bonds (Bill Gross’ latest letter was all about this, for instance). But I don’t think it goes too high still. Maybe 3%.
As a student of economics, this is the first time i’ve heard of ‘imported deflation.’ The world accused us of ‘exporting inflation’ back in the 60s, now we’re importing deflation? Googled it and am still unsure what that term means. Does it just mean we’re consuming what the world is producing? Because high inflation and deflation are ultimately a monetary phenomenon. So i am not sure how we can import deflation from abroad.
The US dollar is strengthening as funds flow to the greenback from the Yen and EUR and others. Stronger USD means lower inflation. If the Fed were to hike rates, dollar would skyrocket and inflation would tank. Easy peasy. Europe is trying to stimulate their economy by making their goods cheaper for Americans. A German made VW could retail in the US for 20% cheaper this year with no impact to VW’s EUR bottom line. Just an example. This drives prices down. Importing deflation.
haha…don’t think it’s all ‘easy peasy’ my friend. So i see your definition of imported deflation. It’s more like a ‘beggar thy neighbor’ policy.
Sure, its not that easy. But when you look at funds flow, I can’t find a good argument why long ratea would climb (unless the Fed starts selling bonds like crazy). If the Fed really wants to hike rates, they’ll probably invert the yield curve and trigger a recession.
part of it has to do with the US savings rate. the imported products are now 20% cheaper so you now have 20% more in pocket than expected. you don’t all of a sudden buy 20% more stuff when you don’t need it so on the household level it either gets saved or credit growth slows. this is probably a big reason why the US is experiencing a slow growth mini-phase right now as consumers have yet to change their spending habits. i wouldn’t necessarily call it “beggar thy neighbour” or “importing deflation”. i’d call it the J-Curve effect and it is temporary as all currency effects are.
i agree that rate will be lower for longer in North America as it is near impossible to breakout to the upside in a slow growth, negative rate world. we have to be approaching the liquidity trap stage right?
The dollar has strengthened because the fed is talking about hiking rates this year and all other major economies are easing. If the fed holds off I could see the dollar falling, inflation ticking up and long end rates rising. But they won’t go too high because of the foreign bid.
If you knew on the day QE 1 started how large the Fed balance sheet would be today, how would you have played the treasury market? I, for one, would be broke. I would have thought the Fed must have lost their minds. Without QE, where would the price level be? Would we be in a deflationary spiral?
@Geo,
I am not disagreeing with you. I also think rates will stay down here for some time mainly due to slow to no growth domestically and broad. That’s why everyone is easing. Strong dollar doesn’t necessarily mean lower inflation. Sometimes inflation is masked. Again, the almighty Fed can not impact long rates. Money just changes hands.
Yeah, ‘beggar thy neighbor’ is too extreme. Don’t think this is what’s going on. I just don’t know another way to describe it.
At this stage of the cycle, it’s not surprising rates are this low. QE is all the Fed can do. What the Fed don’t realize is that QE will not help at all. We made some huge mistakes back in the 30s. We will not make those mistakes again. So imo price will not go down any further.
Rates are going to cotinue to remain low for quite a period of time. Portugal has a lower 10s than the United States and I find it hard to believe that U.S. rates will start to rise anytime soon.
Rates are going to cotinue to remain low for quite a period of time. Portugal has a lower 10s than the United States and I find it hard to believe that U.S. rates will start to rise anytime soon.