Is the Selloff in Treasuries Overdone?

Curve Watcher's Anonymous notes that yields on US treasuries are the highest since mid-2011.



click on chart for sharper image

• $TYX: 30-Year Long Bond
• $TNX: 10-Year Note
• $FVX: 05-Year Note
• $IRX: 03-Month Discount Rate

$TNX Daily Chart



Since May, the yield on 10-Year treasuries is up 137 basis points (1.37 percentage points) to 2.98%.

Mortgage rates are up similarly.

Here is set of charts from Bankrate.

30-Year Mortgage Rate on June 11



15-Year Mortgage Rate on June 11



30-Year Mortgage Rate September 5



15-Year Mortgage Rate September 5

• Since the beginning of May 30-year fixed rates have gone up from 3.36% to over 4.5%.
• Since the beginning of May 15-year fixed rates have gone up from 2.6% to over 3.5%.

Given mortgage rates generally follow the 10-year treasury, it is likely that current mortgage rates are about 10 basis points higher than shown in the September 5 charts above.

Bill Gross's View

Bloomberg discussed Bill Gross's view in a report Treasury Yields Reach Highest Since 2011 on Bets Fed to Taper QE

Gross’s View

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed’s intent to keep benchmark lending rates at almost zero.

“The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross said in his monthly investment outlook on Newport Beach, California-based Pimco’s website today. “Central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”

Gross’s Pimco Total Return Fund (PTTRX) has dropped more than $41 billion, or 14 percent of its assets, in the past four months through losses and investor withdrawals. The fund suffered $7.7 billion in net redemptions in August, Chicago-based researcher Morningstar Inc. (MORN) said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second highest amount this year.

Not That Simple 

If things were that simple, the 10-year yield would not be at 3% right now, and Gross would not have suffered a drop of $41 billion in assets.

Yet, I sympathize with the viewpoint.

Is the Fed going to raise rates? Nope. There is a zero percent chance of that.

Should Fed tapering purchases from $85 billion to $75 billion or $65 billion have that much effect?

All things being equal, the answer is no. But all things are seldom equal. Rates should not have gotten as low as they did for as long as they did. 

Historical Perspective



On a historical perspective, rates have never been where they have been for the past few years. On that basis alone, there is plenty of reason for yields to rise further.

One statement in the article is rather curious. Did you catch it?

Here it is: "Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed’s intent to keep benchmark lending rates at almost zero."

Did Gross Really Say That?

The short-term treasury rate is a mere 0.15%. There are no capital gains to be had by interest rates falling. And short-term rates are not rising either (a point on which I agree with Gross).

So there is nothing about short-term bonds that will be bolstered except perhaps in relative terms (meaning everything else - stocks and bonds - lose money).

This is precisely what Gross said, straight from Seventh Inning Stretch

...the safest pitch to swing at may not be stocks but the asset that will soon be the nearly sole focus of central banks. Instead of QE, central bankers are shifting to “forward guidance” which, if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns. If unemployment and inflation rates can be at least closely guesstimated, then front-end yields become the most reliable bet in the ballpark, Pete Rose notwithstanding. While low, they can at least form the basis for curve rolldown and volatility strategies that have higher return/risk ratios than alternative carry options such as duration, credit or currency. With Big Investor unsure or perhaps unable to catch stock, long bond or currency fly balls in today’s afternoon sun, it’s perhaps best to field boring slow-rolling grounders based on policy rate stability for “an extended period of time.” Recall as well that the result of Minsky’s “Big Government” and “Big Bank” policies has always been accelerating inflation at some future time. We recommend longer-dated TIPS as insurance against just such an outcome.

Gross never used the word "bolstered".

He did say "front-end yields become the most reliable bet in the ballpark".

Gross also stated "the result of Minsky’s Big Government and Big Bank policies has always been accelerating inflation at some future time. We recommend longer-dated TIPS as insurance against just such an outcome. "

There is a difference between "reliable" and "bolstered". And as protection against inflation, Gross also recommended longer dated TIPS.

If the selloff on the long end is over, or nearly over (I don't know, nor does anyone else) then it is long-term treasuries that will be bolstered.

Should rates rise much further, and housing take a huge hit as a result, a genuine buying opportunity in long-term treasuries may present itself.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com