Interest Rates–TLT

November 12, 2016November 12, 2016 Hamilton

The then,June 14 and now charts as usual;

The TLT represents 20 year government bonds. The move in the last four months is from 144 to 122, or 22 full points. That is the same as a move from 1.69% to 2.58%,or roughly a full percent. With this long a duration that is a lot of money if you are on the wrong side!

More importantly, these wedges or diagonal triangles in EW jargon normally retrace completely back to the base which would be around 90, or perhaps even 80 if the wedge is bigger than we expected. The RSI suggests a bounce here – back to the trendline? – and then we have another 30 to 40 points to go.

A great ETF, TBT, also done by Barclays, is the 2X inverse Us Gov. Bond >25 years ETF. Here is a picture for the past year;

There are quite a few others, both leveraged or not and with a whole range of durations. To me it is not clear that this move has much to do with the elections. But, on the other hand, I am not sympathetic to a number of Trump’s policies but there is one that I would wholeheartedly agree with and that is get rid of Yellen.

Interest Rates, update

April 7, 2015 Hamilton

The usual then – Aug. 22 , 2012 – and now charts (see also previous blogs).

The US 10 year bond hit a year low back in August of 2012. We anticipated that event basically on the symmetry from 1945 to 1979 to 2012. 33 years up followed by 33 years down, the exact dates are hard to find so this is a rough measurement but nevertheless quite accurate (see previous blogs). At the time a new low was still anticipated but that never materialized. The wedge, however , is clear as daylight and consequently the 4% was reasonable as that represents the base of that wedge. No new lows were made in the 10 year (the 30 year did make a new low). Most of 2013 was the year of the Fed’s “conundrum”, they had promised more QEs etc. and still rates went up, not down.

We are always taught to expect the unexpected but when it arrives we are surprised and annoyed that it was not the expected outcome. This is along the lines of Donald Rumsfeld’s known and unknown knowns and unknowns. My guess is that interest rates will rise more rapidly than is now expected so Greenspan’s 2013 conundrum might well become Yellen’s 2015/16 enigma. From an EW perspective, there was never a conundrum , nor will there be an enigma. Both the conundrum and the enigma only exist if one assumes that the Fed. (or other CBs) actually can control interest rates. This may not, in fact, be the case at all. After all it is possible that we have spent the past 6 or so years in one of those famous “liquidity traps” from which it is almost impossible to extract the economy. Pushing on a string as we all know does not work but at the Fed. this is apparently still an unknown unknown.

There are undoubtedly many households, banks etc.etc. that have been egged on to do more business or borrow more than they otherwise would. The relative low cost has been a great stimulus for doing so. Should rates change unexpectedly and by more than is now expected, you can rest assured that the vast majority did not expect the unexpected.

Interest rates, US 10y bond

August 16, 2013August 16, 2013 Hamilton

The usual then – 22d of August, a year ago – and now chart. You saw it here first!

This near perfect diagonal triangle (even if it did not quite make it to the trendline), and the fact that interest rates had gone up from 1947 to 1980, 33 years or so, and then down again for an equal 33 years (markets just love symmetry for some reason) and also the often overlooked fact that rates were at an unbelievable low of 1.4% made us make the call that rates would go up. All this despite evidence to the contrary provided by the Fed. promising a new form of never ending QE. By the way it is worth noting that every time the Fed. came out with a new variation on that theme rates went initially went up, not down. Here we are a year later and every and any central banker all over the world is reading from the same page of Keynes’ Alice in Wonderland in which he opines that the only good interest rate is a zero rate. Oddly enough this otherwise consummate economist did not, in his heart, believe that there is time value to money and consequently there need not be a market determining that time value.

Which brings us to the present value concept. Basically discounting the proper math itself, every cash flow in the future, be it from a bond , a stock, an annuity, rent or whatever has a present value equal to the sum total divided by the interest rate. As the interest rate is the devisor, the value of everything starts approaching infinity as rates drop closer to zero. At the margin miniscule changes in the rate has enormous effects on valuations. The moves in the 10y bond over the last year has not been miniscule, in fact it doubled and that is huge. Put in this light, it is absolutely amazing that stock markets are still valued as they were a year ago. We really are in Wonderland.

For ease, here is that analysis, from June 2012, again;

Another way of looking at it, is demonstrated clearly by a look at MFC, Manulife;

Notice that the stock has nearly doubled in precisely the same period that interest rates did. Contrary to talking head opinions this is not because life insurance etc. is that much easier to fund at high rates (which, of course, it is), but because the actuary value under present accounting requirements changes instantly with the rate (but that does not help the wealth management side).

Interest Rates, update

September 19, 2012September 19, 2012 Hamilton

This is a great chart, unfortunately I cannot find the source but you can get the charts separately from St. Louis Fed and the Japanese Treasury Department. I have added the last few weeks! Since the announcement of the 40 bln. / month purchase of mortgage backed securities for an unlimited period in the future, interest rates have actually moved up, but so far at least not in a meaningful way. In the mean time Japan has joined the group of Central Bankers by announcing another 10 trillion yen of bond buying ( about 125 bln. US, bringing total to 700 bln.) Other Central banks have simple lowered the fraction in fractional-reserve banking or, as in the case of China, gone straight for infrastructure improvement programs.

Japan is not America, that much we do know. The yen is not a reserve currency and Japan holds about a trillion US dollars as reserves. China another two trillion. So the US is beholding to its creditors, for Japan this is mostly an internal matter. Japan has an aging population and is not keen on immigration. The US has a much younger generation but is nevertheless not that keen on immigration anymore either! Japan has a collective mindset, the US for the most part subscribes to Ayn Rand type of raw capitalism. I don’t think any of this really matters, what does is that Japan embarked on a easy money policy years ago and its stock market is still down 75% and real estate about 80%. If the US follows this example we would have another 14 years to go, that is to 2027, give or take a year. The assumption seems to be that the Fed. can do what it wants but perhaps this will prove to be incorrect.

The US 10 year bond on this log-scale chart, could have made a nice wedge which could be complete. If it is it should break the upper trend-line soon. The alternative is that we just completed a 4th wave which would allow for about another 1/2 year of low and lower rates. That is the least likely alternative at this time, preferring the scenario where rates start moving up right away. See our previous blog of June 7, 2012.!. Below is an additional chart of the 10 year constant maturity. From 15+% to about 1.5%

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