Tuesday, June 14, 2016

Germany has now been added to the club for countries with 10 year treasury bonds with negative rates!

negative 10-yr bunds

DYI Comments:  Germany is added to the list of countries 10 year Treasury maturities that have gone negative.  Japan was the first to go negative then Switzerland, now Germany.  Who is next? What I do know done the line these long term bonds will be the short of a decade.  Just as the knowing investors since 1981 bought long bonds especially 30 year Treasuries and every two years bought a fresh 30 year T-bond trouncing the return on stocks by a wide margin.  Or for those who were very clever bought long dated Treasury zero coupon bonds trounced stock returns just as pigs go slaughter.     

Of course that was then....today, as they say, is today.  As Europe's economic, financial, and political problems continue to compound yields will be sent into a downward tail spin pushing more and more countries into negative territory.  Investors will be seeking positive yields(who wouldn't) the U.S. has positive rates and the U.S. Dollar is the best looking horse in the glue factory.  So.....Expect heavy buying from Europe along with continued buying by the Japanese.  THIS WILL PUSH DOWN RATES.  Add on a recession - a flight to quality -  government bonds yields will drop precipitously. How low?  I would not be surprised in that scenario 30 yr T-Bonds under 2% and 10 yr T-bonds less than 1%.

Why then has DYI's formula "kicked us out" of long dated bond market?

Yields are now so low they have passed our threshold of 100% below the mean as measured by price to interest(PI) using the 10 year T-Bond as our proxy.  The average or mean is 4.60%(22 to 1 PI) and as of 6-13-16 1.62%(62 to 1 PI).  Simple arithmetic (62 - 22) / 22 x 100 = 182% below the average! THIS IS INSANITY!  

The Fed's and other 1st world central banks with sub atomic/negative rates has distorted or as Austrian economic thinkers - malinvestment.  Major corporations are emitting debt for all practical purposes at zero cost.  In turn pushes businessmen into non-economic transactions due to the heavy hand of world wide central banks.  This consolidation of public and private firms reduces employment all based upon speculative bets due to seductive sub atomic /negative rates.

At a backdrop of 2% GDP growth if the central banks would step aside and allow market rates long term 10 yr T-bond rates would settle in around 5% or 6% with short rates oscillating 3% to 4% depending on flow of growth for GDP.

DON'T TAKE THE BAIT!

Many investors have bonds along with stocks to reduce market fluctuations.  In their frustration to obtain yield they have moved to long dated bonds exposing their portfolio to additional risk.  In their attempt to reduce risk they have unknowingly increased risk.  

Mr. Market in the end will set rates!   

When?  How's this for honesty....I don't know.  But it will happen.  There will come a time when central bankers will lose control of their price fixing of interest rates.  They will fight it but Mr. Market will begin his journey of raising rates.

So hang onto your head while everyone else is losing theirs! 
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AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 6/1/16

Active Allocation Bands (excluding cash) 0% to 60%
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DYI

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