Im posting this because I am personally a bear on treasuries (who isnt though), and this article interested me mainly because in the Ascent of Money program they make Bill Gross out to be as someone who holds the fate of the american bond market in his hands, and suggested that if he lost faith in treasurys the system would collapse. Now that that has happened, I dont really see a huge crash in treasuries.
http://dealbreaker.com/2011/03/bill-gross-would-r…
When do you guys expect for world demand of treasuries drop to a level where the US government might have to think about defaulting?
What would we use as the risk-free rate?
Correct me if I'm wrong but surely his flight from government debt is a sign of weak yields as others race to safety rather than a belief of impending default.
this is truly a bullish sign for the bond market...the biggest seller is done selling. This article actually catalyzed today's rally in bonds IMO...a long-only guy like Gross cant get any shorter then totally flat.
What the hell are you saying OP, you do or don't see a impending crash in Treasuries?
The OP is surprised that the bond market hasnt crashed...this surprises him because he read some book that said that when Bill Gross threw in the towel the world would end...so he is basically asking why the sun managed to rise today after Gross got done selling all his USTs. Luckily for us, the book was wrong and it turns out that there is other, non-Bill Gross-driven demand for US govt bonds.
Chill out, I was merely pointing out how in the show (didnt read the book) they made such a big deal of how Bill Gross has the treasury market in the palm of his hand when in fact the effects they predicted did not come true at all.
OOhhhh SNAP!
Lol, that's just the total return fund... Also the PIMCO guys came to my campus last week. I talk to one of them. They are bearish on treasuries. Bill has also been saying that for month on the investment outlook. They are still one of the big buyer out there tho . Right now, Fed has been buying 75% of the treasuries since QE II. The rest are foreigners and bond funds. You think it's a bullish sign? We will further discuss that after the end of QE II....
Gross having sold his whole treausry book is most definitely bullish in the short-term. This is like a godzilla movie where the japanese military just unloaded a bazooka on the the monster, the smoke has cleared, and godzilla is still lumbering forward. Remember that for a market to go down it usually requires someone to sell...Well we know one big player that wont be selling anymore since he doesnt have anything left.
And BTW just to be clear, QE doesnt end until June last time I checked. Its 30 degrees outside so that must be awhile from now yet.
Naw, it's June. Here is what I know. He had 22% in US government related bonds in Total Return Fund last Dec. The fund is about 240 billion. So he unload equivalent to 48+ billion worth of treasury over 2 months. Is that a lot considering the depth of the market? Anyway I remember a few weeks ago, 2 years and 10 years yield went up a bit. Not sure if it is because of him. Anyway, the concern is not him. It's the Fed. Once QE is over, we may have a problem.
when people say they are "bearish on treasuries" are they saying they are bearish on the yield?
No, bearish on price, dude. Yield goes lower, that's bullish for bond. Future yield will go higher. That's the durational risk Bill has been talking about. Higher and steeper yield curve.
As mentioned, his monthly investment outlook and podcast. Explained how they have been moving from USTs in certain terms to emerging markets and other assets.
The question I would like to know is where they will re-deploy that capital.
I guess no more QE after June?
Exactly. I wonder who will be able to fill the gap. I can't think of anyone besides QE III. Enlighten me...
Why do people keep asking about a possible US debt default? Hasn't Japan taught us anything? If it really gets too bad, instead of pulling a Japan, we can just massively print money, spend more to prop up the real economy, and crank up interest rates. This will destroy financial institutions and the savings of baby boomers, but they will deserve it after throwing our generation under the bus.
No one said US will default. Sure, they can flood the market with free money, devaluing the currency. But how is this any different with a default? It's like saying, you bought a mortgage bond, and 40% of people has defaulted on the under mortgages, and the rest refinanced it, so you get your 60% of your money back. You would call this a default event. So in Fed's situation, you flood the market with USD, so USD depreciate hypothetically say 20% against a basket of currency and real goods. All those bond investor is screwed because they lost either 20% in terms of their own currency or in terms of purchasing power. It is an implicit default. That's it
Japanese situation is a bit different. At least their central bank didn't finance 75% of government debt. This is debt monetization. This is bad for pretty much everyone.
Your post makes it sound like markets always weigh things perfectly. They're far from efficient. If we defaulted like the Russians, it would be psychologically devastating and the amount of irrationality combined with everyone pulling liquidity would have a disastrous effect on markets. There are also huge frictional costs associated with an actual default. This is far worse than gradually diluting dollar assets by the same amount.
Please tell me how QE and QEII has monetized debt, other than the smidgeon of MBS (relatively) the Fed has bought. It is literally the exchange of cash assets for nearly cash assets.
Putting this into numbers:
Total return fund AUM 1,242.1 bln
Fund in USTs 12% = 149 bln
Daily volume in 2006 (best I could get without Bloomberg) : 4/500 bln
So the fund could have sold their holdings in a couple of days without hurting the price too much.
Agree that the biggest holder is now out of the market and cannot go flatter, Gross got it wrong on Britain last year so is not infallible, perhaps the recent breakdowns in correlation between USTs and market volatility is a signal that the rest of the world no longer considers USTs safe haven assets and was the signal Gross was looking for. I'm bearish on bonds for that reason and they've outperformed equities for so long that it must be equities time.
Where are you guys getting your numbers from?
Many sources state sth like this: total fund aum: 240bn 12% of that were treasuries, which were unloaded at some time in feb., e.g. in the beginning (http://www.reuters.com/article/2011/03/10/PIMCO-treasuries-idUSL3E7EA06E20110310)
as people before mentioned, if the market really were bearish, this unloading would have caused sth. but it seems quite healthy, looking at how everything was digested. maybe this is also just another indicator of risk-aversion. http://finance.yahoo.com/echarts?s=^TNX#chart1:symbol=^tnx;range=ytd;indicator=volume;charttype=candlestick;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
what i am wondering is, is how funds want to generate income right now, i.e. before QE2 ends. playing the steepness? and what will happen when qe2 actually ends? is there any experience with this kind of stuff? QE is still active in the UK as well, right? and Japan is just a QE-addicted mess.
ending qe2 abruptly in combination with further problems in oil-producing countries could become really nasty. and then also the worsening situation in the PIGS + higher ECB rates. i am wondering how central bankers want to encounter these upcoming issues.
Anyone think he is unloading what will soon to be worthless bonds, if a QEIII doesnt happen? I personally think he is worried that the FED stops buying up UST and the interest rate will have to jump siginificantly, thus making anything he owned pretty much worthless.
There's actually a good case for treasuries not to go down for awhile. If indeed risk assets have been depending on the Fed to rise, they should take a hit once QE2 ends. If risk assets are getting smoked, where are investors looking for safety going to go? Treasuries.
Oh yeah? I believe Bill Gross will disagree... Where do you think he put his money now? Surely it's not treasuries. If he decide to have nothing to do with treasuries, then I am sure he is not dumb enough to put money in those risk assets which are exposed to treasuries.
"Where are investors looking for safety going to go?" Not treasuries... conventional wisdom doesn't work here anymore, bud.
Ahem. I believe in this case the conventional wisdom is what Bill Gross is doing. What securities not exposed to interest rates are you suggesting Bill Gross is buying instead chief?
if the dollar is no longer a safe haven, then how do you know that treasuries are still a safe haven?
Who decided the dollar isn't a safe haven? If Europe's rate hike backfires and Portugal/Spain blow up, a dollar rally would most likely be in order.
Pal, the conventional wisdom here is to adapt to a new environment and make sound judgement. And I use Bill as an example here, because he appears to be right.
As you acknowledged, there might be a problem at the end of the QE II. If you agree with that, then most dollar denominated assets are not safe haven. Spain? Blow up? I don't think you know what you are talking about. Spain is far from blow up. The problems there are still contained in several savings banks, not a sovereign debt crisis at all.
What securities is not exposed to Fed's interest rates? A LOT.... Certain commodities, currencies, many emerging markets, non-dollar denominated assets. If that is still not satisfying, use financial engineering to eliminate interest rate risks, make the first order and second order of partial derivative of your portfolio with respect to interest rate to zero.
Bill is probably betting on the side with interest rate swap, credit spreads between US and its major trading partners...
The markets kinda did GB. While I agree with you going forward with a rate hike backfire, after Greece's downgrade the dollar should've gained and yet it didn't, which I see as a negative.
I'm not convinced he's shifted completely out of the dollar - just treasuries. My sense is that Gross sees treasuries as offering a negative real return, and he's going to sit and wait until yields go up to offer a real incentive for him to buy back in. My guess is PIMCO is allocating more to U.S. corporates and munis, and to some extent maybe increasing their weights of sovereigns that have strong debt/GDP ratios. They've been pretty clear that they're staying away from Greece, Ireland and the like (my guess is most of the PIIGS, although I don't know for sure).
In any case, he runs a total return mandate... no need to sit in "risk-free" bonds if he feels he can earn a more favorable return per unit risk in corp credits and other sectors. I think this is extremely bearish for treasuries in the medium term. The smart money has left the building. It's pretty clear that the marginal buyer right now is the Fed, and that's scary. The second they let up, get ready for a rate spike.
I agree with you. However, you don't need to completely get out of dollar to hedge your interest rate risks.
The idea that somehow things are different this time is crap. Just because all correlations went to 1 at the heart of the financial crisis doesn't mean it has to stay like that. Doesn't mean it can't happen but I find it cavalier to decide that the dollar and Treasuries are no longer safe just because Bill says so.
As far as Spain goes, I'm exaggerating by saying blow up but if Portugal requests a bailout (looking likely considering their CDS spread and the upcoming rate hike), the market will turn to next likely victim, Spain. Spain pulling a Greece/Ireland is a nightmare/unlikely scenario, but that could definitely push foreign buyers into Treasuries (those that made up 50% of buying before QE2)..
Every single asset you listed is affected by interest rates, no need to go into that. Yes you can hedge interest rate risk, but in that case, why not buy Treasuries and hedge accordingly?
Finally, today looked like a major risk-off day and we saw every thing go down except Treasuries and the dollar.
btw. This whole case isn't necessarily my view on what's likeliest. I actually think a major oil spike and euro debt crisis will be avoided and the ECB rate hike will depress the dollar, increase our exports and soon enough inflation, leading rates to rise a lot once the Fed pulls out. But I read a Lex column mentioning the possibility of what I outlined earlier and the fact that nobody has been saying this peaked my interest.
K, lets clear this up. 1) Why do you think country like Ireland get into the situation they are in? From a banking crisis to sovereign debt crisis? They did what we did. Irresponsible fiscal spending and took those bad debt from private sector to government balance sheet. I am not saying we are going to have a dollar crisis or a treasury crisis. The timing of those things are unpredictable and depends on future policies by the white house and Fed. Continuing the current path is bad for everyone. Bill will laugh in the end. 2) "Every single asset you listed is affected by interest rates, no need to go into that. Yes you can hedge interest rate risk, but in that case, why not buy Treasuries and hedge accordingly?" This depends on what do you mean by affected. Sure, I can do some regression and find that the correlation of those assets and interest rates are not zero. Or use some marcoecon explanation to say that everything is effecting by everything. 3)Why not buy Treasuries and hedge according? Ha, thats the whole point of getting out of Treasuries. You earn a much higher yield per unit risk and your hedging cost is much less, because your expose to interest rate risk is much less than Treasuries. 4) Finally you point out today's market condition to say dollar and treasury is still safe heaven. I agree with you on that for now, and it does look like a risk off day. But in this post, we were talking about mid term (after QE) and long term possibility of higher interest rate, and higher interest rate scenario.
1) While our attitude isn't that different from Ireland's, there are a couple key differences. One, our banking sector doesn't come close to representing the same share of GDP. Two, we aren't part of the euro. Why that helps should be obvious when our exports gain after Europe raises rates. 2) I don't think at any time in history has the impact of rates been so clear on risk assets than it is now. Yes, valuations were going to rebound, and yes, there are major supply and demand factors affecting commodity prices, but the strength of the current rally whether in equities or commodities has been greatly affected by ZIRP and QE2. What happens when QE2 ends is the million-dollar question but I would suggest starting here : http://www.ritholtz.com/blog/2011/03/the-end-of-qe-part-ii/ 3)I don't disagree here, but if we are in risk-off mode, where are people going to pile in? Gold? That's a catastrophe waiting to happen. Prices would go parabolic and then everybody would get smoked the minute someone needs to cash out. 4) Long term, I see higher interest rates as well. But I think Bill Gross might be a little early on this and the 70% of buying power he sees as missing could just be crowded out from the market. When the Fed steps back, risks assets could well suffer and push people looking for yield into treasuries.
Also, I just read this after I posted the above post, which is very interesting: http://www.mercenarytrader.com/2011/03/risk-on-dollar-bears-and-potenti…
[quote=GoodBread]1) While our attitude isn't that different from Ireland's, there are a couple key differences. One, our banking sector doesn't come close to representing the same share of GDP. Two, we aren't part of the euro. Why that helps should be obvious when our exports gain after Europe raises rates. 2) I don't think at any time in history has the impact of rates been so clear on risk assets than it is now. Yes, valuations were going to rebound, and yes, there are major supply and demand factors affecting commodity prices, but the strength of the current rally whether in equities or commodities has been greatly affected by ZIRP and QE2. What happens when QE2 ends is the million-dollar question but I would suggest starting here : http://www.ritholtz.com/blog/2011/03/the-end-of-qe-part-ii/ 3)I don't disagree here, but if we are in risk-off mode, where are people going to pile in? Gold? That's a catastrophe waiting to happen. Prices would go parabolic and then everybody would get smoked the minute someone needs to cash out. 4) Long term, I see higher interest rates as well. But I think Bill Gross might be a little early on this and the 70% of buying power he sees as missing could just be crowded out from the market. When the Fed steps back, risks assets could well suffer and push people looking for yield into treasuries.
Also, I just read this after I posted the above post, which is very interesting: http://www.mercenarytrader.com/2011/03/risk-on-dollar-bears-and-potenti…]
I agree with some of those things you are saying right now. I disagree with a few. 1) yes, we are different from PIIGS. yes, Portugal 5 year CDS at 500 bps (latest session) lvl may indicate they need a bailout. That may lead some capital into buying treasuries. However, thats still a short term outlook. 2) yes, a lot of current rally in equities and commodities were subject to QE, cuz treasuries are earning negative real return and the hot money has to go somewhere and thus pump up those markets. However, I would argue that there are undervalue out there, especially in emerging economy, wouldn't you agree? 3) yes, I agree that believing in Gold is like believing in God. The price is what people say it is. It has no economic value in production or consumption (maybe only for Tiffany's). The only apparent value of Gold is to hold value, which the notion itself is ironic. Thus I am an atheist. Where are people going to pile in then? hmm, emerging market aside, if Bill can allocate 50 billions in two months, there are places. I am not as intelligent enough to argue which. I am in school right now, if I am not, I would be doing research in MUNIs markets, as I see CDS on some of them will become very value in a year or so. (think the similarity between states municipalities and Euro zone PIIGS, no monetary power, debt ratio... and no bailout from the Fed) 4) yes, if Fed steps back, treasuries, equities, bonds, commodities will to some extent go down, interest rate spikes. Then what? then the new treasuries' yield are attractive, so investor will buy. yes, I agree with that too. However, if you know that, then you would agree with Bill. QE ends at June. He gets out now to avoid rate spike. Once rates is up to justify the risks, sure, he will come back to be a buyer again. Probably buying back the old bond he sold now at 80 cents on a dollar. Also he said something on Feb 4th, that he don't see the rate hike this year from Fed. So I assume he is expecting an even more volatile rates environment in the future.
Btw, thx for sharing the links. I will read it tmr after my exam, and let you know what I think.
Good discussion, bud!
All I will say is that this is actually massively positive for the bond market - the positioning shows that Gross is basically long spread products - mortgages, corporates, EM debt. You don't buy those things if you think the world is coming to an end, or if you think yields are about to blow out. The steeper implied forward curve will kill mortgage basis, risk aversion will destroy EM debt and corporate spreads will blow out across all classes as consumer dv01s smack top line numbers.
Your example in QEI is right, but the Fed is basically swapping reserves for Treasuries in QE2. That money is taken out of the system. It's not like the Fed will begin buying up massive amounts of other assets with those Treasuries (well a small fraction of it is used to buy up bad MBS assets like in QE1), so it is not new money injected into the system. Bank balance sheets are essentially the same before and after a QE transaction. As long as the Fed does not go about doing bad things like buying more CDO's and whatnot, it is not debt monetization. And they have only been doing this with the interest from QE2 Treasuries.
Fine. Fed get treasuries and US treasury get commercial bank reserve. Yeah, it would be terrible if Fed use treasuries to swap for more bad assets. I hope they didn't otherwise I would be more bearish. Now look at what US treasury is doing with the bank reserve... Paying off interests on the old bond (owned by investors, not Fed reserve) and finance fiscal spending... Right?
That's new money in the system buddy.
Thanks for the argument GekkotheGreat. I'm not sure I would call emerging markets undervalued, but they have been underperforming and if the end of QE2 brings on a steep decline in commodity prices, EM equities might get a boost from higher margins and money pouring into the countries that have been raising rates for a while. Definitely a contrarian bet.
I dont want to get into an argument about where the bond market is going in the long or even medium-term, but it is pretty obvious that PIMCO having sold all their US treasuries is wildly bullish for the market. Anytime a big fish is done selling that is a very positive technical. I am not going to get into a debate about whether the world is coming to an end as its a waste of time.
Aut quia ipsum reiciendis at ut. Modi ipsam ut esse. Praesentium omnis eum sit a rerum provident unde.
Totam sunt praesentium perspiciatis a ut nostrum sit. Qui neque sapiente sapiente delectus dolorem a. Perspiciatis est accusantium quaerat ea distinctio commodi omnis. Et soluta reprehenderit quis aliquid delectus et sed. Dolore quaerat natus deleniti velit dolorem. Amet sapiente pariatur autem fugit et sit nihil nostrum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...
Fuga molestiae facilis voluptatem ut sequi. Cum deserunt delectus earum inventore consequatur ut harum temporibus. Exercitationem tempora dolores a aliquam facilis corrupti. Voluptatum et qui maiores et. Et aspernatur qui consequatur. Dolor non dolorem aut sequi nihil animi.
Asperiores accusantium hic excepturi repudiandae consectetur nihil eum. Blanditiis cupiditate harum cumque rerum rerum accusantium velit. Molestias cum recusandae odio et numquam libero dolores. Sunt quae odit veniam nulla. Laborum accusamus quibusdam delectus molestiae quae architecto repudiandae.
Magnam placeat asperiores placeat. Corrupti sit ducimus quisquam sapiente. Animi voluptatem voluptas neque ex quisquam.
Saepe excepturi voluptatem saepe. Reprehenderit nam quod dolores et recusandae expedita. Et ea adipisci quisquam error dicta libero pariatur at. Dolores unde debitis ad dolorum et.
Eveniet ducimus aut similique ut voluptatibus dolorem. Sed quia quasi dolor deleniti. Ipsam corrupti sunt laudantium rem dolor labore. Voluptatum temporibus totam expedita accusamus.