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Sunday, June 3, 2012

10 Year US Government bond at new low...ever!

We are close to ringing the bell......the bell that signifies we are hitting the lowest yield EVER to be seen on US treasuries.  The 10 Year US bond yield is at 1.47% on 6-1-12.
Chart below can be found at clicking here:
Also notice that Black Monday in the 1980s was PRECEDED by a rate decline....possibly indicator in near term market fall?

How can this be? Isn't the US government issuing debt at a staggering rate? 1.5 Trillion+ per year, AND the 15  trillion of debt is rotating at some percent per month?    Why yes, it is.

Four years after the 2008 market crash, there is still a high demand for fixed interest, basically avoid risk.   There are many factors, including baby boomer demographics.  In droves baby boomers are moving into less risk as they enter retirement.  Also, there is the US as still the global currency, with countries around the world buying US bonds in an attempt to keep their currencies from rising.  China is the most obvious country who buys US treasuries in droves to peg their currency.  There is also the safe-haven play as Europe destabilizes and China deflates.

All of this results in a trading opportunity.  We are close to, if not already at, a golden opportunity to trade.  To bet AGAINST US Bond rates.  This play has been around for a while, and it has been a huge loser.  Those betting against US Bond rates have lost their shirts.    But here we sit, at 1.47 interest rates.  Will 10 year hit 1 percent? Maybe.  Zero percent, although possible, hardly likely.  At some point, when the rates are this low, you are better off in short term treasuries such as 3 months, or 1 year.  The difference is hardly worth a 10 year commitment.  At 1.47 we are close, if not at a bottom.  At 1 percent, there are plenty of other low risk investments that can compete for a 10 year commitment.

What does this mean for trading?  Well buying US bonds as a commitment right here is risky, if rates do start to rise, then your bond values bought at these levels will fall.  After all, if you have 10 year bond at 1.47 percent, who will buy it if brand, new, fresh from US government pays 1.55 percent?

The play here is to purchase instruments that gain value as interest rates rise.  I wouldn't recommend any large purchasing, just tiny amounts, and build the position as the rates decline, such as TNX (10 year US bond rate).  1.47 may be the 200 year low we will never see again, or maybe, it will hit 1 percent or lower in a panic.  But rest assured, these rates cannot stay here for 100 years, or even 10 years.  There are few bets in the market as lopsided as this.  It is true that we are in unprecedented times, and there is no guarantee that rates will rise in the near term, but time and history is on your side, if you have the patience.

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