The above data shows the interest rate on 10 year Treasury notes (through July 6th, 2011). I wanted to look at it to see if bond markets were showing any kind of stress over the negotiations about raising the debt limit. It appears not (there is no spike upward at the end). Whether this means that investors are confident a deal will be struck, or confident that even if a deal is not struck, their interest payments will be honored, I am not sure.
Update: Commenter rjs suggests looking at CDS data instead. I found this data for 5 year CDS at Bloomberg:
Little sign of panic here either.
you're looking at the wrong thing stuart; those anticipating a US default will insure near term debt thru credit default swaps...even on june 15th, the cost of CDS to insure US 2 year debt was higher than that of the cost to insure the same for brazil or italy..
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Stuart,
ReplyDeleteYou may want to include Barron's Confidence Index here. The index compares yields of high grade bonds with lower grade bonds. Under financial duress the yields diverge and vice versa. For fun you may want to overlay the index on the S&P 500. One can quickly see how useful it is...
http://www.sharelynx.com/chartstemp/BarronsCI.php
Despite much reading and thinking it is a mystery to me why long interest rates are as low as they are. Who in their right mind would tie up cash for 10 years at a few percentage points?
ReplyDeleteAnything you can do to shed light on this mystery would be appreciated.
Geez, Rob, that's not hard at all. Currency manipulators, like China, have little other choice for much of their holdings. Anyone legitimately holding reserves that needs to increase their reserves, would buy. Bond funds that intend to invest in treasuries would. Pension funds, ditto. Anyone who thinks the eurozone is headed for trouble and the US market is over-blown might.
ReplyDeleteYou may be forgetting a few things. One, you don't have to hold it to maturity. Two, as long as you earn more than the inflation rate, you're making money, fairly safely. Three, lots of people/companies hold some cash and equivalents, which are an even worse investment, because they need assurance of return of investment more than return on that particular money. Everyone is supposed hold a small amount of cash somewhere safe - any good financial planner will tell you that.
"Who in their right mind would tie up cash for 10 years at a few percentage points?"
ReplyDeleteThose with no where else to go?
Many investors now are, IMO, more concerned about the return of their investment rather than the return on it. The investment game is one of making hay while the sun shines, and not getting torched when it isn't. Longevity is the key to success, and capital preservation allows one to keep the key.
Don
P.S. Buying ten year bonds does not mean one has to hold them to duration. If the equity mkts correct substantially, we'll see a big switch, again...
Actually, there's another reason. Economic recoveries from financial crises tend to be long, drawn out affairs, with little growth and long periods of unemployment. If you expect this 'recovery' to follow that script, 3% might be a decent return over the next ten years - with very little risk. If you think that oil prices may rise enough next year to crash the global economy all over again (with some help from world-wide austerity measures and Europe's debt problems), we might yet get deflation, and 3% on top of deflation is a nice investment indeed.
ReplyDeleteIn addition to the points made above, I'd point out that we probably have more desire to save than useful investments to make in the broad US economy at present. The savings are coming from the somewhat higher personal savings rate now, as well as inflows from overseas (Chinese currency management). Meanwhile, there are comparatively few attractive investment opportunities, since the economy has over-capacity relative to demand. An excess of savings supply over investment demand implies low interest rates.
ReplyDeleteThanks to all of you. Interest rates could move very quickly in a crisis and we have many brewing crises. I'll stay in short term treasuries (and gold). People invested in long term bonds may be wiser than me but I'm betting my life savings that they are not.
ReplyDeletePolitically, both sides will make a deal. The Repubs are just bluffing- it is their Wall Street friends that will lose the most if the US falls off a cliff. So the financial industry has no serious worries yet. As we head to a partial shutdown, the Repubs lose brownie points a lot faster than Wall Street loses money.
ReplyDeleteSecondly, the European crackup leaves us as still the most coherent, safest game in town. Nor is the stock market on fire. Nor are China's dollar flows slowing down much.
Under President Ron Paul this might be a different matter.