The U.S. economy is picking up steam and the Fed’s quantitative-easing approach is helping and, as a result, investors should watch out for a possible spike in interest rates once growth is well under way (later this year) warns billionaire financier George Soros. It has been suggested that this would adversely affect bonds but not everyone agrees. Read on!
According to comments on SeekingAlpha.com “Bond investors might want to study the price action in 1994 if Soros is right in that interest rates are going to take a big leap once the economy gets moving – nothing profound there, but like 1994 it could sneak up and bite fixed income longs. Soros suggests it might already be happening already and once the fog of the budget nonsense lifts, economic strength will be far clearer to see.” [Read: What Do Rising Interest Rates Mean for the Price of Gold?]
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Tom Luongo‘s response to a question regarding his opinion on the 30 year U.S. Treasury bond, as put forth in a post on Seeking Alpha entitled Why The Long Bond Will Continue To Defy Gravity is that:
“I refuse to fight the Fed and the Fed is supporting the long bond. In the long run, however, it’s toast. Book it. Beat it. Rail against it all you want, but the 30 year U.S. Treasury bond will drop drastically in price.
The big question everyone wants answered is, of course, when, but I’m sorry to report that I have no more a crystal ball on this than the Mayans did about the end of the world – and if I claimed such knowledge I would recommend you stop reading anything else I ever write because I would have given you prima facie evidence that I am an idiot. So, while I may be an idiot, I’m not about to go out and consciously advertise that fact in public. Hence, I don’t know when the long bond is going to approach dying, only that it will. In the meantime, your shorts of the iShares Barclay’s 20+ year Treasury Bond ETF will continue to lose you money because fighting the Fed is a losing bet….[Read: Believe It or Not: U.S. Treasuries Could Be Best Performing Asset Class in the Next 1-2 Years – Here’s Why It’s Quite Possible]
To answer the original question…[here is my] reason why I don’t think the 30 year Treasury bond is going to break down in price any time soon. Just watching the violent trading action in the bond market…tells me that someone is coming in to prop up the price and kick it back towards “fair value,” whatever that means in these financially repressed “markets.” My guess is that’s the Bank of Japan – and the Fed. (In no way do I think this is healthy, sustainable or even sane, but it is reality and my opinion on what is the right thing to do is irrelevant to the question at hand.)
The Fed is trying to have its cake and eat it too. It wants inflation but it doesn’t want to allow the effects of inflation to show up in the markets it can control. This is part of its psychological game plan to get money flowing and keep confidence high. By controlling prices in the bond markets, in which it is one of the few players left, it can- in the short term- control the major inflation-hedging assets: gold, oil, TIPS. This manipulation has certainly spooked the Gold community but to them I say that the fundamentals in gold have not changed and to continue buying at what amounts to bargain prices. The Chinese certainly are….
Sometimes things are as simple as ‘buy the under-valued asset and sell the over-valued one’ and the 30 year U.S. Treasury Bond is as over-valued as an asset can get. Trade it if you want, but I think it’s suicide. the Fed already steals enough of our money, why would you give it to them willingly?”
Editor’s Note: The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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