Here's an opinion switch for me... http://scriabinop23.blogspot.com/2009/01/buy-treasuries.html For a trade, that is. While my previous writings fixate on both what I've perceived as a US Dollar and Treasury bubble, especially in the face of mushrooming government budget deficits, the safer obvious position to take for the long term seems to be short treasuries and long precious metals. Simply put, government entitlement and debt obligations of the modern era necessitate inflation targeting policy, unlike the days of 1930s. The common gospel is that the money will eventually flood the system to remedy the gloom, and deflation will soon be a thing of the past. OK. That was my disclaimer. Now for an interesting trade - the opposite approach. I think treasuries might offer a good value here. With the 30 year Mar09 future trading in the high 126's, I can't help but think of the following factors being supportive in the near term, contrary to my previous view: The banking system is still broken and insolvent. Despite unmultiplied aggregates of money supply recently off the charts, the effective multiplier due to this insolvency is lower. M2 is barely untouched. This won't last forever - but it may last another 6-12 months easily. Until either mark to market is abandoned or another trillion or two of cash is given to the banks, nothing will change. Fear and dread will continue. The Fed is saying they will buy long term treasuries. We're early in the game. They are done with $35B of agency purchases, out of a $500B total projection. The target is 4.5% mortgages (or below) for consumers out there. My intuition says they will not let the free market ruin their stated ambitions. In fact, a weaker currency exchange rate resulting from aggressive debt monetization might kill two birds with one stone: attaining lower mortgage rates while stimulating exports and increasing the overall price level (thus ending the deflationary trend). Decreased Trade Means Smaller Trade Deficit: Less aggregate demand, becoming somewhat inevitable due to likely too small government stimulus and effective enough remedy of the banking system. Smaller trade deficits are supportive of the US dollar and government debt assets. While demand for treasuries is smaller from trade partners, a strengthening dollar may incentivize them to hold tight. Where else to put assets? (Only so much gold...) Higher Savings: Likewise, larger anticipated government budget deficits (trillions per year for the next several years) may be financed in this environment with increased internal savings rates more than offsetting reduced debt purchases from the likes of China, Japan, and the mid-east. Look at Japan's treasury curve for an example of what high savings rates can do. Their 10 year is at 1.3% and 30 year at 1.94%. Smaller trade deficits equate to more capacity to save. Perhaps here is the seed of another idea: Japan's trade surplus will likely narrow, reducing their ability to fund government debt as effectively. US 30 year debt at 3.58% looks like a steal in comparison to Japan's. Might be a great spread trade, short Japanese 30 year debt to buy US government 30 year debt. Continued Deflation Prospects: The good old fundamental argument to buy treasuries. The long end of treasury curve is not far from 5% higher in price than the top of the range its been stuck for the better part of several years, even in the days of $147 crude and heightened inflation fears. There is a value here, especially concerning the environment going forward. Conclusion: In the past, decreased savings rates were offset by increased trade deficits to provide a ready supply of funds to explain past treasury market strength. A future of the opposite, increased savings rates and likely smaller trade deficits, results in the same support - with a ready supply of money to bid on these instruments. I've not abandoned my long precious metals stance, so perhaps long treasuries and long gold is a great approach here. And short Japanese bonds to carry into US long bonds.
I have also closed my short positions in ZB for now. The main reason for closing my short is because there will be a much better entry level soon. FED is forced by the market to take action against the rising long end of the curve. They said they would buy the long end twice now and did not act. If they start buying, it will happen like always, they will tell their friends at GS about it (to let them front run) so if you see strong rising ZB without any further news you know what is coming. Some days later FED will come out with a lot of TamTam and tell they are now buying long end and will target maybe 2.5% on the long end. This will cause a massive short squeeze and maybe they will be able to hold 2.5% for few months but in the end they will fail because investors will not take part any more in the auctions (2.5% is a joke) and FED will have to take all the shit in their balance sheet, not looking good. But again, for right now beeing a short term bull in thresuries makes sense to me. One of the risc factors however is panic selling of russia who have sold thresuries in the last days to support RUBEL from falling to hard. This may continue for some while.
This Russian dynamic is interesting, and makes perfect sense. Have any links figuring out the treasury exposure they might have unloaded recently?
my gues is that it is around 15 billion give or take. The total left of reserves in US-Dollar should be around 150-200 Billion. Of course they will not let this drop to zero so they will let the rubel fall further until there is a natural balance. But anyway they made a good trade because they bought threasuries at a much lower level !