Wednesday, May 18, 2011

TIPS Breakeven Spread Falls to Three-Month Low

The "breakeven rate" - the difference between 10-year nominal Treasury yields and 10-year Treasury Inflation Protected Securities (TIPS) yields - is one market-based measure of expected future inflation.  As of yesterday the breakeven rate was 2.30%, down 30 basis points from the recent peak of 2.65% on April 11, and the lowest level in three months (since February 17).  

20 Comments:

At 5/18/2011 4:14 PM, Blogger Benjamin said...

So why are T-bill yields so low? Serious bond investors think inflation is dead.

Moreover, bond investors may pricing their loans at a lower, true rate of inflation.

Donald J. Boudreaux is chairman of the Department of Economics at George Mason University in Fairfax, Va.

In 2006, he wrote, "But can we trust the CPI? I think not. For a variety of reasons, it significantly overstates the amount of inflation we've suffered -- and, thus, it misleads us in estimating changes in real wages over time."

You just can't get more right-wing than Boudreaux without wearing a funny little mustache and having involuntary arm spasms.

In fact, our own Dr. Perry graduated from Mason.

I will leave to others to explain why the head of the Econ Department at Mason is wrong when he says the CPI overstates inflation.

Or why anyone is afraid of inflation when the core rate is under 2 percent, and even that rate is thought to be overstating inflation.

As for me, I want an economic boom, and I say the Fed should pour it on.

 
At 5/18/2011 4:56 PM, Blogger morganovich said...

"So why are T-bill yields so low? Serious bond investors think inflation is dead."

um, no.

serious bond investors think inflation in understated, notably bill gross of pimco who refuses to hold ANY us treasuries.

"The United States is headed for a period of slow growth mixed with high inflation rates, a nasty cocktail for U.S. bonds, says Bill Gross, co-head of Pimco, the world's largest bond fund."

"Gross argued that inflation rates in the rest of the world have averaged nearly 7% over the past decade, while the U.S. official inflation rate has averaged 2.6%. "Does it make any sense that we have a 3% to 4% lower rate of inflation than the rest of the world?" Gross wondered."

volcker agrees with him.

gee, do you think bond yields might be affected by the fed buying 40-60% of the auctions?

and by asian economies holdiong down their currencies?

75% of the US bond market is buying for reasons other than yield.

that's why yields are low.

it has nothing to do with "serious bond investors" and everyhting to do with financial manipulation.

 
At 5/18/2011 5:02 PM, Blogger morganovich said...

It’s official. Bill Gross is divorced from the U.S. Treasury. The PIMCO Total Return Fund, the largest U.S. mutual fund at about one-quarter trillion dollars, now holds no U.S. Government securities.
What’s up? Is the U.S. about to be downgraded? Is it bankrupt? Or is this a political thing?
None of the above, according to Gross:

"It's not a question of dissing the United States or questioning the credit of the United States, but simply a maturity reflection," Gross said. Treasurys are "mispriced [too high, meaning yields are too low] relative to the inflationary environment and the growth we see ahead and there are better alternatives in order to capture yield.”

i wonder if this has to do with QE2 ending and the knowledge that market pricing will return to the bond market.

 
At 5/18/2011 5:27 PM, Blogger Che is dead said...

Here's a major investor who is short:

"Bonds in the US have been in a bull market for 30 years, Rogers said.”In my view that’s coming to an end…the bond bulll market is coming to an end. If any of you have bonds I would urge you to go home and sell them. If any of you are bond portfolio managers I would get another job,” he said. Addressing one bond portfolio manager among conference delegates, Rogers said: “If I were you I would think about becoming a farmer. You buy land and learn how to farm.”

CNBC

And here's a very nervous long:

"A financial crisis is surely going to happen as big or bigger than the one we had in 2008 if we continue to behave the way we're behaving." -- Stanley Druckenmiller, legendary investor and onetime fund manager for George Soros. The grave danger he sees is that politicians might give the government authority to borrow beyond the current limit of $14.3 trillion without any conditions to control spending.

In 1995, Bill Clinton was threatening to veto budget cuts advanced by the Republican House. In return, congressional leaders threatened not to increase the federal debt ceiling. Back then, before Americans knew what a real government spending crisis was, the debt stood at less than $5 trillion ... in September 1995, "the bond market rallied throughout the period of the so-called train wreck ... and, by the way, continued to rally. Interest rates went down the whole time, past the government-shutdown deadline, and really interest rates never went back up again until the Republicans caved and ... supposedly the catastrophic problem was solved." ... "I owned [Treasury] bonds ... We made a fortune being long bonds during the whole fight. We were advocating a default and we were long bonds. That's kind of putting your money where your mouth is. By the way, I'm long them today."

But what if Mr. Obama hangs tough, Republicans cave, and there is no spending reform between now and the 2012 elections? Would Mr. Druckenmiller sell his Treasurys? "Everything else being equal, that would be a big sell factor, not a buy factor. One of the reasons I bought the Treasurys a ways back was I thought [House Budget Chairman Paul] Ryan was serious. I mean I heard some serious things that I hadn't heard in a long time." When President Obama responded to Mr. Ryan with a harsh partisan attack instead of a serious policy proposal, "that made me feel not as good about my Treasurys as the day before. But I'm still long them," he says.

"We don't have a choice between Paul Ryan's plan and the current plan, because the current plan is a mirage. . . . That money is not going to be there."

WSJ

 
At 5/18/2011 5:37 PM, Blogger Benjamin said...

Morgan Frank (Chicken Inflation Little)-

Yields across the board are low, every type of bond.

Google just borrowed $5 billion at 2.3 percent. 2.3 percent!!!

Are you going to say Bernanke bought up all the Google bonds?

These were sophisticated lenders.

Explain to me how Google can borrow at 2.3 percent, if inflation is a huge and major concern?

Cluck, cluck, cluck--and call up the Chairman o the Econ. Department at Mason and let him know that inflation is really running at 10 percent a year---meaning US workers have had wages cut in half in the last five years.

Do you know what the word "crank" means?

 
At 5/18/2011 5:54 PM, Blogger Rick Caird said...

Bond yields are low because the Fed has a ZIRP. That is reflected across the whole variety of fixed income investments. I might add the PIMCO is also moving significant assets into gold.

At these interest rates, it makes as much sense to hold cash in a safety deposit box as in MM funds paying .1% interest. And, like Bill Gross, I would not invest in any longer term treasury maturities. Yields will go up and the value of the bond will go down.

 
At 5/18/2011 6:36 PM, Blogger morganovich said...

benji-

"Explain to me how Google can borrow at 2.3 percent, if inflation is a huge and major concern? "

wow. your ignorance appears to know no bounds.

corporate rates get set off of treasury rates.

the corporate market is TINY compared to govvies. offering even a tiny increase in yield draws a ton of buying as there are huge bond funds, funded by allocation strategies at brokers and money mangers, that NEED to be 100% invested. this drives yields for the best US companies right down to treasury yields. it's just a ton of demand chasing very little supply.

this is especially pronounced right now as distrust for treasuries is very high as the end of QE2 nears.

what you really ought to be asking is why google, who has $37 billion on it's balance sheet, thought these bond rates were so attractive that they borrowed $3bn despite not needing it in the slightest. the buyers were bond funds who have to be 100% invested who are funded by 401k contributions. that's DUMB money and money that only has to beat an index, usually us treasuries.

you sure throw a lot of ad hominem around for someone who 1. knows as little about this as you do and 2.is claiming to be right where the best bond investor in all of history is wrong.

but, as you have shown over and over, you delusions of grandeur and for that matter, even comprehension, are all unfounded. i have little doubt that you shall, as ever, remain impervious to logic and data, but i suppose one never knows. one day you may surprise us all and understand. perhaps if you did not smell so much varnish on a regular basis?

the fact that you would even ask that question about google demonstrates that you know ZERO about how bond markets work. any econ grad ought to know that. it's straightforward stuff.

shouldn't you be sanding a table or something?

 
At 5/18/2011 6:41 PM, Blogger Benjamin said...

Rick-

Yields may go even lower.
There is a chance we become the United States of Japan. And there are global gluts of capital.

We may sink into minor deflation and extremely tepid growth, ala Japan.

The Fed has to get aggressive.

The Nipponistas are the biggest threat to American security and prosperity today.

 
At 5/18/2011 6:43 PM, Blogger morganovich said...

PS -

as ever, your numbers are wrong.

google issued a $3bn bond, the long end of which was at 3.734%, not 5 at 2.3.

http://www.stock-market-today.cc/business-news/Google-has-completed-a-bond-issue-of---3-billion.html

your ability to misstate simple facts never ceases to amaze.

 
At 5/18/2011 6:55 PM, Blogger morganovich said...

"Explain to me how Google can borrow at 2.3 percent, if inflation is a huge and major concern? "

are you really this ignorant? i am utterly astounded by you sometimes. econ degree? no way.

corporate yields are set off of treasuries. for the best companies, the spread is very small.

why? because there are tons of dedicated US bond funds that have to be 100% invested. the corporate market is VERY small relative to treasuries. even a tiny uptick in yield from a company such as google who has essentially 0% of default and everone jumps all over it. you pick up 50bp of yield for no additional risk.

thus, they can issue 10 year debt at 3.73 vs the us bonds at 3.18.

this effect is magnified right now. everyone knows US treasuries are going to tank. they have all been busily selling them to the fed, who are buying hand over fist. when QE2 ends, it's going to get interesting. nobody wants to be holding that potato.

they need to put that money to work somewhere. they are trying to beat a benchmark and in a great many cases cannot go outside the US. they are taking in flow of funds from 401k etc. they need to buy something. this is why the whole market gets set off of federal rates.

far from being smart buyers, they are desperate money. they have to buy.

google has $37bn in cash on their balance sheet. they just borrowed $3bn. what you really ought to be asking is why a company that doesn't need the money would be issuing debt.

google is the sophisticated player at this table.

the fact that you asked this question at all demonstrates that you are not sufficiently educated to be in this conversation.

any undergrad should already know this material.

go back to sniffing varnish.

 
At 5/18/2011 7:06 PM, Blogger Benjamin said...

Morgan-

Google's average cost of borrowing was as I stated--they have three maturities in the $3 billion worth of IOUs.

"And even if none of this works out, Google's cost of borrowing $3 billion will only be about 2.3%, which in an historical context is not very much." --Scott Grannis.

Grannis is an excellent blogger and economist.

You are in the uncomfortable position of predicting a hyper-inflation no serious player in the markets sees. Huge institutional investors are willing to lend to Google for 2.3 percent. They could buy land. They could buy stock. They chose to buy Google bonds. Perhaps they feel the CPI overstates inflation--surely, that is what they are saying by investing in Google bonds at such low interest rates.

You are right about one thing--there is a glut of capital, and no where to put it. Western investors and policymakers need to come to grips with this new reality, which I think may become chronic.

It will mean that "zero bound" will hamstring efforts to boost the economy through lower interest rates. QE may become a permanent Fed policy tool of choice.

Long run, the capital glut should mean boomtimes to the moon for real estate and equities.

But first, we need to get past the deflationary trap that has snagged Japan, and may grab the USA.

 
At 5/18/2011 7:07 PM, Blogger Benjamin said...

Morgan-

Google's average cost of borrowing was as I stated--they have three maturities in the $3 billion worth of IOUs.

"And even if none of this works out, Google's cost of borrowing $3 billion will only be about 2.3%, which in an historical context is not very much." --Scott Grannis.

Grannis is an excellent blogger and economist.

You are in the uncomfortable position of predicting a hyper-inflation no serious player in the markets sees. Huge institutional investors are willing to lend to Google for 2.3 percent. They could buy land. They could buy stock. They chose to buy Google bonds. Perhaps they feel the CPI overstates inflation--surely, that is what they are saying by investing in Google bonds at such low interest rates.

You are right about one thing--there is a glut of capital, and no where to put it. Western investors and policymakers need to come to grips with this new reality, which I think may become chronic.

It will mean that "zero bound" will hamstring efforts to boost the economy through lower interest rates. QE may become a permanent Fed policy tool of choice.

Long run, the capital glut should mean boomtimes to the moon for real estate and equities.

But first, we need to get past the deflationary trap that has snagged Japan, and may grab the USA.

 
At 5/18/2011 8:27 PM, Blogger VangelV said...

So why are T-bill yields so low? Serious bond investors think inflation is dead.

Oh, I don't know but let me give it a shot. It could be that you have the Fed buying large at the margin and that it allows the US banks to borrow at no cost as long as they use the money to buy treasuries. Other central banks are also large buyers as they want to manipulate their currencies so that exporters can sell to bankrupt American consumers. And then we have the pessimists and deflationists who expect the US economy to crash and the Dow to fall to 3,000 and the housing crash to resume. For them losing less than others is a big win.

Moreover, bond investors may pricing their loans at a lower, true rate of inflation.

As many have pointed out, the true inflation rate is higher than what is being reported.

Donald J. Boudreaux is chairman of the Department of Economics at George Mason University in Fairfax, Va....

You are appealing to authority without citing the actual argument.

You just can't get more right-wing than Boudreaux without wearing a funny little mustache and having involuntary arm spasms.

Idiot alert. Boudreaux argues for freedom and is hardly what one would call a right wing fascist. It is you who argue for totalitarianism, not you.

I will leave to others to explain why the head of the Econ Department at Mason is wrong when he says the CPI overstates inflation.

Good idea. Given your inability to make a rational argument it is better to leave it for others to try. While they would be just as wrong as you there are less likely to appear to be as clueless as you are.

Or why anyone is afraid of inflation when the core rate is under 2 percent, and even that rate is thought to be overstating inflation.

They are afraid because they have seen their gasoline, food, insurance, tuition, health care, property taxes, etc., go up much more than 2%. The only things that have gone down in price are their over-mortgaged homes, cell phone services and electronic goods.

As for me, I want an economic boom, and I say the Fed should pour it on.

Me too. Might was well drive the bus over the cliff sooner rather than later. There is still a hope that if a crisis comes voters will throw out both of the big-government parties and elect citizen politicians who go back to the small, limited government in the Constitution.

(And yes boys and girls, I know that the Constitution was a coup by the pro-government power Federalists so let us not go there. Yes, the Articles of Confederation were a better system. My argument is about how to fix what the US has today and going back to the limited powers enumerated in the Constitution is a good first step.)

 
At 5/19/2011 9:11 AM, Blogger morganovich said...

"You are in the uncomfortable position of predicting a hyper-inflation no serious player in the markets sees"

bill gross at pimco is not a serious player?

you are now in the unfortunate position of having said something provably stupid and wrong.

david eninhorn at greenlight is not a serious player?

liz sonders at scwab is not a serious player?

and volcker is an idiot?

and you base you claim on the work of some academics and a blogger?

sorry pal.

but your claims DO NOT hold any water at all.

and what possible evidence do you have for a "deflationary gap". even the rigged CPI number and the GDP deflator are reading in the mid and high 3's. that's hardly deflation. it's 150-200% of our target inflation.

you really have no idea what you are talking bout.

and the average yield of the google bonds tells you nothing unless you compare them to issues of similar duration.

what matters is how their 2 years compare to 2 year treasuries etc.

ps. you still got the face value wrong, and if you re read my posy more carefully, you'll see that i was talking bout the long end (10's) not the 2's or 5's.

so, you don't understand how bonds price and have been caught and proven to be lying about "serious players" (or else you are such an idiot that you do not consider pimco, greenlight, or SAC to be serious) - perhaps you've noticed that the hot trend in hedge funds for the last 2 years has been backing them with gold instead of dollars? why do you think that is? that all the top hedge fund managers in the world are idiots? no. it's inflation bunny.

i have no idea why i try to get this through to you. it's clear that you will ignore any and all evidence contrary to your views so that you can keep you head in the sand and continue bellowing "print more money, it's good for the economy".

 
At 5/19/2011 11:58 AM, Blogger Benjamin said...

Vange-Morgan-

Both of you seem to be saying that Dan Boudreaux is deeply deluded, and unaware that the CPI vastly undercounts inflation. Yet he is chairman of the econ Department at Mason. That's quite a state of affairs.


No worries. In fact, Boudreaux is correct. The CPI consistently lags behind incredible productivity and product improvement in goods and services, and consumer switching.

Vange- The arm spasm line was a joke. Jeez, and I thought left-wingers had no sense of humor. The Austrian School takes itself way too seriously, especially when you have zero modern-day empirical proof of your claims.

 
At 5/19/2011 12:14 PM, Blogger morganovich said...

"Both of you seem to be saying that Dan Boudreaux is deeply deluded, and unaware that the CPI vastly undercounts inflation. Yet he is chairman of the econ Department at Mason. That's quite a state of affairs."

no. it's not. academics are wrong all the time. hell, lots of them are keynsians.

the head of cambridge used to believe that the sun revolved around the earth. did that make it true?

i'd side with bill gross or volcker over the head of any university in the world, to say nothing of a 3rd rate school like GM.

this is why your appeal to authority arguments always fail.

other authorities disagree.

this is why it's an invalid debate technique. nothing is gained from your saying "the econ department at GM things X" and my saying "the econ department at brown thinks -X". it's just a waste of time.

it appeals to you because you have no grasp of the subject matter.

 
At 5/19/2011 1:43 PM, Blogger Benjamin said...

Morgan-

Show to me a single respected economist who states that the CPI understates inflation.

 
At 5/19/2011 2:20 PM, Blogger morganovich said...

bunny-

1. volcker. perhaps the most respected inflation fighter of all time.

2. liz sonders, c heif economist at charles schwab

3. paul mccaullay at PIMCO.

you will be unable to name even a single "inflation apologist" with anything like that gravitas.

note that assets managers, unlike the ivory tower statists at universities, actually have to be right.

against this you throw the boskin partisans and a bunch of third rate university hacks?

pul-leez.

bet with the guys who have been repeatedly paid for being right, not the guys who maintain office by telling lies.

 
At 5/19/2011 2:21 PM, Blogger morganovich said...

ps-

i take your repeated returns to pointless appeals to authority to be an admission that you lack any command of the subject matter. (not that i had any doubts)

nice to see you admitting it though.

 
At 5/23/2011 12:32 AM, Blogger VangelV said...


Vange- The arm spasm line was a joke. Jeez, and I thought left-wingers had no sense of humor. The Austrian School takes itself way too seriously, especially when you have zero modern-day empirical proof of your claims.


Let me see. Over the past year gold, copper, and oil are up almost 30%. Silver is up around 100%. The grains are up. Stocks are up. I would say that the evidence is with me and against you. Yet you keep ignoring the reality and buying into the propaganda from the government. You guys remind me of all those people who used to believe what Pravda was reporting about the production in the USSR.

 

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