Friday, 27 January 2012
Strategas: risk of 10 year Treasuries not rewarded
What is the market telling since the revelations of the views of the FED- members, that tell they forecasts a hike until in 2015 and the promise of Bernanke that QE is very interesting?
1. They price in a first hike at the end of 2013 (but history learns the market prices in hikes often too early)
2. Half 2014 the pace of hiking accelerates (history learns that the markets often underestimates the pace of hiking when they have started)
3. In the long run over many years, when I should already be retired for quite some time, the FED rate ought to be 4%
Further Strategas analyses that investors in 10 years Treasuries are not good at their mind.
In the coming three years, the period in which one can hope the FED members stick to their forecasts and not start hiking, investors take a priced in return of 0.94% a year on their 10-year rags. Do you really want to take all the price risk on a 10-year bond for such a paltry 0.94%? Of course not when you are a rational expectations believer, but too many buyers including the FED with QE and some central banks that want to prevent a rise of their currency or because of Solvency II, are buying at any price. As long as the belief that there are more buyers at any price than sellers at too high prices the hedge funds and other fixed income pirates still dare to go long in Treasuries.
(By the way. for investors in 5 –year Treasuries the coming three years a holding period return was priced in of 0.96%, that means you don’t get rewarded when you take more duration risk (of the 10-year bond)).
Is the increase of the central banks a never ending story?
At a certain moment (I think that will be one, two years away at least) the bond market vigilantes will say that we have seen a Minsky moment for central balance sheet sizes; some central banks will be seen as having gone too far and they will have to reduce their balance sheet as fast as possible, that will be impossible because they will suffer huge losses when they sell too fast.