Treasuries Rallying: How Long Can it Last?
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From Bloomberg:
Ten-year note yields touched the lowest level in seven weeks as investors submitted the most bids on record at a $19 billion auction of the securities on July 8. Demand from an investor class that includes central banks increased at this week’s record four auctions. Confidence among U.S. consumers fell in July to the lowest level since March.
Speculators are reacting as expected so far, fleeing to the “safety” of treasuries. I consider this play foolish, but it takes time to change learned herd-like behavior. Rising yields are one of the more “obvious” long-term plays here. There is just too huge of a glut of supply, due to multi-trillion dollar deficits as far as the eye can see, to be absorbed by the market. As a result, yields will rise significantly in the next year or so. I am adament that money will eventually move towards the gold sector instead of treasuries as confidence in our fiat-based currency system erodes.
Traders have been cutting inflation bets, yields indicate. The difference between rates on 10-year notes and TIPS, which reflects the outlook for consumer prices over the life of the securities, narrowed to 1.52 percentage points yesterday from the 2009 high of 2.13 percentage points last month. The spread averaged 2.21 percentage points for the past five years.
All yields are telling us right now is that traders are mispricing inflation risks. For whatever reason, there is a widespread belief that recessions are deflationary. This view assumes consumers are the main drivers of inflation. However, inflation is not solely a demand-driven phenomenon, but also a function of deteriorating confidence. I’ve never seen a currency implode in a linear fashion, and I suspect the dollar won’t either. Just wait, fears of deflation will reverse and turn into fears of inflation very soon.
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