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.

FED: inflation below official target, QE interesting, LT FED rate 4%

The last meeting of the FED had several new things: an official inflation target of 2% (for the first time in history) and a new way of communicating: All 17 members of the FED had to give their forecasts for the FED rate in the coming years. The Fed hopes that people will believe even more that they will keep interest rates near zero for quite some time. Officially the FED told the rates will remain near zero until (at least) the end of 2014, not half of 2013 as previously was signaled and from the individual forecasts you can even deduct that according to the forecasts a hike will arrive in 2015 (or maybe further away).

The FED suddenly told they had an inflation target of 2% for the PCE (prices of personal consumption expenditures as measured by the GDP) and the central forecast (chart of ABN AMRO) shows they expect the PCE to remain below 2% in the coming years. Meanwhile they expect the unemployment rate will decline but remain way to far above the 5-6.5% that could be normal (NAIRU). That and the fear to lose their job made Bernanke to announce a new round of QE (quantitative easing) was an interesting idea.

The individual forecasts of FED- members are indicated with dots by Calculted Risk. There is an Albanian majority that the FED rates will not rise in the coming year, but also that the FED thinks in the long run the FED rate ought to be 4%.

The central banks have colossal balance sheets: China 1, ECB 2

In 2006 the Bank of Japan, the inventor of huge QE, had to surrender the first place to the Peoples Bank of China, while the ECB continued to follow the Chinese track. In the last few years the Fed attacked to get the second position, but the last few months the ECB is racing ahead in the direction of the PBoC.

(chart of Bianco: all the balance sheets are translated to US Dollars)