Why is the 30 year rate so low?
Looking at treasury prices, the rate on the 10 year is 2.709 and the rate on the 30 year is only 2.970.
Who in their right mind would buy a 30 year treasury over a 10 year treasury with all the extra inflation risk (20 extra years of duration) to get a measly 0.2% extra in coupons?
It seems like a spread trade going long the 30Y and short the 10Y could make money since this spread has to increase. Is there any logical rationale why the spread would be so low? Any doing this trade? What is the most cost effective\least risky way to make the bet?
the long end of the bond market is forward looking...and those whose job it is to look VERY far forward see a crash coming in the stock market like 2001 or 2008...they don't know the exact cause...but they feel that the stock market is "too high" and so they are buying 30yr bonds to hedge against that expectation. This causes the 30yr part of the curve to outperform, and thus, the yield curve "flattens".
Recall that the Fed is now raising OVERNIGHT interest rates...but the Fed does not control the long end of the curve...that is driven by supply and demand.
The recent kink is the Trump tax reform...which is going to be paid for by increased debt issuance...which should push up interest rates...but mostly in the front end and the belly (5yr-7yr) With the Fed raising rates (effectively pressing on the breaks of the economic expansion) often the DIRECT result is a stock market crash. So, the 30yr flattening makes perfect sense.
In addition to the above commentary- 2016-2017 the yields of long ended bonds were suppressed by foreign buyers who came in to buy treasuries in their global search of yield as other developed countries/Central Banks' monetary policy kept their rates low. BoJ keeping their rates near 0.10, ECB just recently started raising rates same with BoE.
Isn't it usually steep rate hikes that contribute to market crashes? I wonder if they keep a policy of an increase 0.25% every QTR or HLF YR if we'll see as dramatic of a "crash".
Good explainations but it still doesn't make sense to me.
If someone is moving money into bonds expecting a collapse, why would they buy a 30Y treasury that will get wiped out if inflation\interest rates take off? They could just put money into 10Y instead and it is only 0.2% less.
The same for the foreign buyers searching for yield... why wouldn't they just buy the 10Y instead? Are they that hungry for yield that they are willing to risk getting slaughtered by inflation risk?
Your logic is correct, broadly... However, the market has swallowed the secular stagnation thesis hook, line and sinker, which has shifted probabilities of various outcomes around. That really is the main thing, IMHO, but there are other, more transitory factors at play as well.
yup...and the aggregate thinking is...a stock market crash is accompanied by DEFLATION...not inflation...because assets get destroyed.
Now, recent experience teaches us that in the event of a crash, central banks will print money till the cows come home to keep the status quo...so with the next crash there should be a reckoning...but it hasn't happened yet (ignoring the Wiemar Republic pre-WW2)
However, if you think we will see both a crash AND inflation....then you should buy 10yr or 30yr TIPS.
I think it's also the way the CBanks are expected to print money next time that matters. We have seen that, in the future, QE is likely to be the way of dealing with economic downturns. Furthermore, whereas you might have believed previously that short rates were floored at 0, you no longer know this with certainty. In light of all that, maybe it's not unreasonable to be very reluctant about shorting long-dated bonds, in spite of sound economic rationale?
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