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Subject:  Re: A Market Top for Bonds? Date:  5/8/2013  6:01 PM
Author:  globalist2013 Number:  34905 of 35623


Prices for key bond instruments create confusing charts. Every time I look at one I have to remind myself, “Interes -rates are the inverse of price. So ‘up’ is ‘down’.” Here’s an example of what I mean.^TNX+Interactive#symbol=^...

ARRGH! Let’s see. Last August’s low of 1.40 in yield had to also be the nearby high in prices for whatever price the 10-year contract was trading for at that time. So let’s pull a 6-month chart for ZN. Opps, no can do, because the relevant contract expired Sept ’12, or at least, I can’t do it through my account at IB, and to pull historical data at CME requires a subscription. OK, so it’s back to charts based on yield, instead of the price of the underlying. But the conclusion is the same. We’re long past a high in that market. Now, let’s ask “Why?” Why did yields -- and therefore prices -- reverse at Support/Resistance? Why did the yield on the 10-year fail to penetrate the 1.60 support level and go on to retest the 1.40? Why is it moving back up to 1.80?

Again, this where this “up is down” stuff confuses me. Does the Fed want higher interest-rates? No, that’s a certainty. As their balance sheet expands, what they have to pay to borrow expands linearly. But if rates rise, then the expansion becomes geometric ,and pretty soon borrowing costs alone will exceed revenues, never mind being able to repay principal. OTOH, the Fed wants inflation to rise, so they can pay off their borrowing with cheaper money. When faced with the prospect of higher inflation, the rational response on the part of lenders would be to demand a compensating yield. OTOH, when those with cash get scared, they will pay any prices they have to in order to park that cash. So, Risk on = falling bond prices, and Risk on = rising bond prices.

ARRGH! This is a world only an economist could love. The rest of us, those trying to make a living from our investing, look at the matter differently. Bonds are like bell peppers and broccoli. If the price was $1.19 last week, and $1.29 this week, we conclude that prices are rising. If the same bond that offered us 7% last week is now offering just 6.5% this week, we conclude that prices are rising. But when average quality, invest-grade debt has become so disconnected from inflation that new issues can come onto the market offering what are in effect negative yields, but the issue is 2x/3x over-subscribed, you’ve gotta conclude we’re in the mother of all buying panics that characterizes market tops.

Consider some more anecdotal evidence. There’s roughly 250 market days per year. If your bond portfolio averages 3 bps per market day, you’re making 7.5% per year, which is a reasonable benchmark for average quality invest-grade debt, or it used to be. If you’re running a properly diversifi