Bond yields were already in steep decline today on ISM news. Trump goosed the market with additional tariffs on China.
Fed Gets Unwanted Reaction
The Fed cut interest rates yesterday in hopes of steepening the yield curve. I noted Fed Gets Opposite Response It Wanted: Inversions Strengthen
Inversions continued to strengthen today on Manufacturing reports: ISM and Markit PMI On Verge of Contraction.
Even before Trump’s tariff announcement, I commented that “I Expect Contraction Next Month.” Click on the link for my reasons.
A global manufacturing recession has already started. Trump’s unwise move increases the odds of an economic recession soon, assuming it has not already started.
Mike “Mish” Shedlock
Too many people here think buying the long bond is a sure thing.
The basic yield does not cover CPI, much less the actual cost of living. Then you have to subtract taxes on the yield, so you are losing money year after year, straight out of the gate.
Ah, but the short term thinkers tell us they are investing in Miami condos for the capital gain, not for the income. Long bonds will appreciate as yields collapse. Its a sure thing, as sure a thing as the condo flippers pre-2008.
What happens if the economy picks up again? Bonds get destroyed.
What happens if the economy stays soft for decades like Japan, you get your just principal back but its worth less because coupons didn’t even cover CPI. The price appreciation goes to zero when the bond matures in 30yrs.
Ah again! The smart alecks tell us they will flip their condos — I mean long bonds — to a bigger sucker before the &*_) hits maturity. Who are these suckers, and what makes you think they are going to buy this garbage from you when and if the US government gets its act together? What makes you think everyone else isn’t going to want to dump their condos and long bonds when you do?
They say history doesn’t repeat, but it often rhymes. Yesterday’s “sure thing” condo flippers are today’s “sure thing” long bond buyers
If history is any guide, bloated governments also default on their debt — which over a 30 year horizon is well within the possible scenarios for US Treasuries. If baby boomer parents were always good for the money, does not mean boomers or millennials will do the same. Actually, history suggests they will default even though their parents taught them better. See every major empire throughout human history for examples.
But lets assume Uncle Sam defaults on Social Security but somehow doesn’t default on Treasury bonds too. Will everyone flip their worthless condo at the last minute, or will a lot of people be left holding the empty bag?
So what’s a good investment here, Tater-Man?
Your asking Tater-man ? Seriously ? (See replies above to see if you might get investment advice).
He’s told us what is unequivocally dumb (long bonds), you’d think he could tell us with equal vigor what the smart play is.
“But lets assume Uncle Sam defaults on Social Security but somehow doesn’t default on Treasury bonds too.”
You do not know how SS works. SS does not issue bonds so it can not default. SS is a pay as you go system so the worst that can happen is to adjust benefits when the as you go part is not enough to cover at current levels.
BTW predicting that some default will happen in 3 years is very useless.
Are you high on something Carlos?
Issuing bonds has nothing to do with going bankrupt. Get a clue.
If SS doesn’t pay 100% of what was promised, that is a default. Don’t be an a$$ and claim that a benefit adjustment isn’t a default.
By that ridiculous definition, Enron merely adjusted their payout by -100%, but it wasn’t a default.
Good grief man, you shouldn’t be writing comments online. You are clueless
wow who peed in your cornflakes? it’s a matter of semantics, but the fact that you’re so worked up about it makes it obvious you have some other agenda. you are in fact part of that un-intelligent electorate you complain of.
Democracy needs an intelligent electorate@harrykoala and @Carlos_ is simply not it.
Go ahead and tell the nice lady at your local donut shop that you aren’t skipping out on your bill, you are just changing the amount of the promise you fell like keeping. See if she doesn’t have a bad attitude also.
I watched Al friggin’ Sharpton try to talk sense into democrats after their disaster of debate. No matter what spin the media tries to put on the debates … when Al Sharpton is your party’s voice of reason, you are screwed.
“SS benefits are not guaranteed legally because workers have no contractual or property rights to any benefits whatsoever. In two landmark cases, Flemming v. Nestor and Helvering v. Davis, the U.S. Supreme Court ruled that Social Security taxes are not contributions or savings, but simply taxes, and that Social Security benefits are simply a government spending program, no different than, say, farm price supports. Congress and the president may change, reduce, or even eliminate benefits at any time.”
As I have said there is no such thing as SS default and the Supreme court seems to agree with me….
After seeing your response I was tempted to call you an idiot but why badder.
Nothing is “guaranteed”, not even when there is a contract. If the money isn’t there, the obligation will not be paid.
But there is also your word. You promised to pay. Now you are not paying. That’s a default, even if you try to play word games you are still breaking your word.
SS collects money under the promise it will be paid back. SS sends out benefits summaries to citizens as though it will be paid.
Argue the semantics all you want, you just told the world your word isn’t worth the paper it isn’t printed on.
In finance, default is failure to meet the legal obligations (or conditions) of a loan, for example when a home buyer fails to make a mortgage payment, or when a corporation or government fails to pay a bond which has reached maturity.
Social security is not a loan or a coupon or based on any financial instrument. The correct term here is renege on its promise to pay. Social security itself is just a transfer payment. The government literally doesn’t need real money when it is just an entry on a spreadsheet somewhere and computers are transferring the money which banks must pay out in the form of a check. Does anyone think the banks ever check the federal government can cash the check it issues ? The government is not like a private corp.
Investments commenters above should consider:
I find it curious that Trump pulled the trigger on new tariffs on Chinese goods at such an early stage of the restarted trade talks, but just one day after Powell displeased him with what he considers to be too meager a rate cut. So, is this how Trump renders Fed decisions on rates irrelevant…knowing that an escalation of the trade war will cause rates to plummet, and probably to a greater extent and more rapidly than the measured pace at which the Fed likes to proceed?
Sorry to inform you, but everything the Fed does is already irrelevant. Japan has been doing this QE / ZIRP nonsense for 30 years and achieved absolutely zero… except bury Japan in even more debt.
One has to be insane to think the Fed can do the same thing and get different outcome.
PS — I don’t understand Trump’s motivations regarding trade and tariffs. If he is using them to promote 2-way free trade (the US gets to sell into China as much as China sells into the US) — then it is a negotiating tactic. US politicians have been all too willing to sell out US businesses / workers (same thing really!), so complaining about Trump’s negotiating style is stupid. Traditional DC’s negotiating style is more properly called capitulation.
Will Trump succeed in opening Chinese markets and creating a 2-way street? … I don’t know. China’s government has over-promised economic growth to its citizenry. Net exports to other countries probably can’t grow fast enough to make up for lost US exports, much less provide for 6% yoy growth that Beijing implicitly promised.
I hope Mish talks more about how the US/China trade imbalance might be addressed, given that both governments have over-promised (and Washington has historically under delivered). Constantly whining and trying to re-litigate the 2016 election is counter productive.
Mish you use to look at things from a macro-perspective. Whatever happen to that ? The reason the Fed is cutting is because 4T of bonds are set to reset over the next few years and cause a major problem unless they reset at a lower rate.
But keep in mind by cutting rates the Fed has to print more money (that’s a corollary of cutting rates) which means the Fed’s assets will go from $3.8T to back over $4.5T. You’re right about Social Security however, it will be ‘defaulted’ on. The easiest fix is to make SS “means based”. Actually the entire USA, if you calculate total debt (all debt) is at 50% of net worth (total). When that goes to 100%, the USA will be insolvent (around 2050 if not before) at the present pace.
That will be by 2032.
Trump has proved once again that he is probably the greatest president ever! What a genius!
Well there you are Trump the stable genius who has run every business to the ground is about to do the same to the US MAGA!
The other stable geniuses that kept telling the exerts of the time are:
Hitler telling his generals how to fight a war
Chavez telling economist how to run the economy
I know how this movie ends
The Fed seems to only be able to control the short end of the yield curve.
If this is true, then the market is setting rates further out. Therefore to understand what is priced in the future, we can ignore the short (manipulated) portion of the curve.
So what is the market telling us with low rates 5 -10 years out in the US and with negative rates in many European countries?
Do inversions mean much now that we are in a new world of negative rates?
When the Fed is the majority buyer and majority holder of longer Treasuries, it destroys price discovery. When large banks are coerced, using regulatory capital rules, into putting lots of balance sheet in to Treasuries regardless of price, it destroys price discovery.
“The Market” isn’t telling us anything. There is no market. There are captive political buyers who must buy at any price.
The Fed announced that their new mandate is to finance out of control spending. Period. They don’t look at price or yield. Price / Yield don’t matter. Keep the party in Washington DC going for a little while longer. That is it. Yields mean nothing.
That is what negative yields in ECB land mean. It means the ECB will print and print and print currency until the bartender cuts them off.
It means a lot of well meaning, but foolish, patriots will be left holding worthless JGBs, Bunds and Treasuries
30yr bond yield down 9 bps (atm). Impressive.
So economic contraction begets DEFLATION, begets lower interest rates in an attempt to increase INFLATION, begets negative yielding bonds, begets DEFLATION, begets even LOWER interest rates, begets even MORE negative yields……where the hell does one invest in this scenario???
Long bond.
Fully expect the 30yr yield to hit 1% (or lower) before its over.
Tony Tony Tony you are correctamundo.
EDV or ZROZ. EDV pays a yield, ZROZ’s don’t have a yield. Both are up around 20% this year. If long rates fall another 100 bp’s, there is still a lot of bang for your buck. If you think rates are going back up any time soon, you should short them.
If yield is what you want how about T or VZ
If you like them, buy them. There are many stocks that have higher yields than bonds. And generally not as volatile as long-term bonds have been over the past year. The only problem is that if we do have a bear market in stocks, they will suffer also. While bonds will likely do OK if the stock selloff is caused by a deflationary decline.
The stocks (actually the companies behind the stocks) are what generate the taxable income that funds the Treasuries. If we get a serious economic downturn, companies (and employees of companies) won’t be able to pay as much taxes and the Treasury will have to admit they can’t pay their debt.
US Treasuries are backed by the US economy. Political promises are worthless. If the S&P 500 companies can’t pay, then neither can the government that depends on the S&P for tax revenue.
If one believes the US economy will be OK overall, a basket of dividend paying stocks will beat bonds after taxes. If the economy gets fitted for a toe tag (not going to happen IMHO), the Treasury won’t be able to pay.
Bonds requires the buyer to sell out after price appreciation (yields down) but before everyone else figures out yields bottomed and before said bond matures at par. If that sounds like you have to time the (bond) market, that is exactly what it is.
This seems more like gambling than investing
Traveling today to the North Rim of Grand Canyon. Reception poor.