Two weeks ago, I wrote about the long term trend in longer term interest rates as lower due to slower economic growth, low wage growth and low inflation expectations. This has been in place since the 1980's. Betting rates will go higher is actually the contrary bet.
And in January, I presented a chart I created that shows every time the FOMC commenced a QE program, rates went up..counter-intuitively. And every time they ended a QE program, rates actually went lower (as they are today with the Taper nearing its end), again counter-intuitively, I didn't explain it quite right at the time but the next section does a pretty good job. See first chart below:
And I just read a similar type of study which shows the Fed's balance sheet vs 30yr and 10yr rates. They describe the reason that rates rally when the Fed's balance sheet shrinks is due to the fact that inflation expectations drop. Inflation is Enemy #1 of Govt bonds so when those expectations drop, so do rates. See the 30yr and 10yr charts below according to the Fed's balance sheet expectations.
I have been out marketing the past number of weeks and the most interest I get from IA's is on where I think interest rates are headed. To be sure, we have been in a long run gov't bond bull market, but will it continue? I think so: growth is low/slow(ing)/inflation is low/wage growth is low...and most of all, the aging demographic is supportive of low growth, low inflation, low wage growth. It may seem counter-intuitive but, betting rates will rise, is betting against the trend.
He pretty much says what I have been writing about...ie...it is large pension funds buying treasuries (as they sell stocks to take some risk off the table after moving from 77% funded to 90% over the past 1.5yrs). Guy must be the only Wall St strategist who is bullish on bonds:
Via Scotiabank's Guy Haselmann,
Long-duration Treasuries continue to look attractive; a view that I have unwaveringly maintained for the past six months for a variety of diverse reasons. I am still targeting a 2014 low by the end of the summer (3.29% from May 28th), as well asa sub 3.00% 30-year by the end of the year.
However, active traders should be aware of the 2014 pattern where yields rise at the beginning of each month into the Employment Report, but then (mostly) resume falling for the rest of the month. In the days leading up to payrolls, traders who own long-dated Treasuries should temporarily hedge via legging into flatteners.
Of all of the various reasons, private pension demand is the most interesting and compelling. Since it is also the most misunderstood, I plan to devote my note on Friday specifically to the topic (traveling until then). The bottom line is that PBGC rule changes will cause persistent and incremental demand over time that overwhelms net visible secondary market supply. Concerns about funding status will trump the private defined benefit plan manager’s fiduciary desire to ‘maximize return per unit of risk’.
C$ HY is cheap on a relative value basis to U$ HY. This is probably best measured on a Yield to Worst (YTW) basis. Investors in C$ HY currently receive about 6.54% YTW while investors in U$ HY receive only about 4.86%...a pick up of almost 1.70% in C$ HY!!
Why is that so important?
1. C$ HY lags the U$ HY market both up and down...IE...C$ HY has lower volatility...a very good thing. If you are worried about a sell-off in risk assets and/or HY, C$ HY provides far more cushion because it is cheap right now and will lag on the down trade.
2. And if there is no large sell-off and we just tick along as is, C$ HY still provides almost 1.70% of excess yield vs U$ HY.
Two very important reasons to be long C$ HY vs U$ HY right now. Click on the chart below...C$ HY YTW less U$ HY YTW. Green is C$ HY is cheap. Red is C$ HY expensive.