Below are some thoughts that I originally posted in a recent In Session thread.
Here’s a short collection of items I am reading about bonds, which is a subject at the top of my watch list right now.
US Treasury Bloodbath Soaks Fund Managers
By: Reuters | 05 Jun 2009 | 04:38 PM ET
Investors have been blindsided by one financial catastrophe after another over the last 18 months, but throughout the tumult, the government bond market has been their friend.
A brutal drop in long-dated Treasury prices has caught even the best money managers off guard—in some cases wiping out as much as 60 percent of the gains they booked in last year’s huge rally in U.S. Treasuries.
The Vanguard Group, Fidelity Investments, T. Rowe Price and Hoisington Investment Management have seen their government funds down anywhere between 10 percent and 30 percent, as record amounts of debt flood the market to pay for the swelling budget deficit.
What’s stunning about the portfolio declines is the swift plunge in Treasury prices within a short period of time despite the Federal Reserve’s buyback purchases intended to hold down interest rates. Benchmark 10-year Treasury yields have surged to levels not seen in more than six months, resulting in meaningful losses for many portfolios.
The 10-year T-note and 30-year Treasury bond are down 8.58 percent and 24 percent, respectively, in terms of price for the year to date.
"If I were clairvoyant and knew we were going to have a sell-off of this magnitude, I would’ve been all in cash, but I’m not," said Van Hoisington, whose flagship Wasatch-Hoisington U.S. Treasury Fund is down more than 20 percent.
Comment: This captures the surprise and the magnitude of what has transpired so far this year. I am sure there are more than a few fund managers who are scratching their heads and wondering where, if anywhere, they can find safety in these markets. Of course, I happen to think that bonds represent the last great bubble, and that when the bond market finally gives way, we’ll all settle into a new and very different future of "less." I am not at all clear on how fast that will unfold, and the answer is critical because it is the pace, more than anything, that will define the ride.
June 8 (Bloomberg) — Treasuries fell, driving yields on two-year notes to the biggest three-day advance since October, and money-market rates increased, on growing speculation central banks will start to raise borrowing costs by the end of the year.
The yield on the U.S. note maturing in May 2011 climbed five basis points to 1.34 percent as of 11:19 a.m. in London, extending its climb in the past three trading days to 43 basis points, the most since Oct. 10. Europe’s Dow Jones Stoxx 600 Index fell 1.2 percent after a three-month rally sent the gauge to the highest level relative to earnings since 2004. Futures on the Standard & Poor’s 500 Index slipped 1 percent.
Comment: That’s quite a hike, in the two-year note yield. While 0.43% (43 basis points) may not seem like much of a climb, it represents a 47% change in yield (from 0.91 to 1.34) over only 3 days. In the world of bonds, that’s abrupt. I still say there’s some coming out of the bond market. I’m not ready to yell "fire" yet, but I am certainly keeping a very close eye on things over there….
June 4 (Bloomberg) — Fixed U.S. mortgage rates jumped to the highest level this year, signaling the Federal Reserve’s plan to lower borrowing costs has stalled.
The average 30-year rate rose to 5.29 from 4.91 percent a week earlier, Freddie Mac, the McLean, Virginia-based mortgage buyer, said today in a statement. The last time the rate was higher was Dec. 11, when it was 5.47 percent. The average 15- year rate rose to 4.79 percent from 4.53 percent.
“That’s quite a jump,” said Donald Rissmiller, chief economist at New York-based Strategas Research Partners. “The more rates go up, the more we need home prices to go down to equalize consumers’ payments. It’s those payments that have brought about a level of stability in housing unit sales.”
Comment: This certainly can’t be helping anything. Some days I think, "They’ve really got this thing locked down," and other days I think, "Uh oh…". Nothing will be as damaging to the Green Shoots Theory than interest rates that choke off any renewed growth. This dramatic rise in mortgage rates (and, we can presume, corporate borrowing) is tied to the rapid rise in the long-end of the Treasury yield curve, which I spent considerable time outlining last week.
The rule of thumb I use is that for every 1% rise in mortgage rates, another 10% will get lopped off the housing market. The reason is very simple. For every 1% rise in mortgage rates, the amount of mortgage than can be carried by any given income level shrinks by approximately 10%. As I said, this is a rule of thumb, and the amounts vary somewhat in either direction, depending on prices and rates.