Good News For Treasury Bulls

Money managers pulled $1.2 billion from the iShares 20+ year Treasury Bond ETF last week, the most on record, and the second-largest withdrawal among U.S.-listed exchange-traded funds across asset classes.

In what I view as a strong contrarian indicator, Long Treasury ETF Posts Record Outflow in Duration Rotation.

Some investors are paring exposure to longer-maturity U.S. debt as the Federal Reserve moves closer to normalizing borrowing conditions in the midst of a leadership transition.

The iShares iBoxx $ Investment Grade Corporate Bond ETF was hit by $460 million of outflows last week, its fourth-biggest withdrawal of the year. The $38.6 billion fund has an effective duration of 8.8 years, meaning it’s acutely vulnerable to price swings spurred by interest-rate changes.

By contrast, shorter-maturity Treasury and corporate funds saw inflows last week, including the SPDR Bloomberg Barclays Short Term High Yield ETF, the iShares 0-5 Year Corporate Bond product and SPDR’s 1-3 Month Treasury Bill fund.

Treasury Yields

There is no reason to believe the long-term treasury bull market is over, either fundamentally or technically. The trend is down, down, down.

Money managers pulling out now will likely chase the rally when it's clear the economy is going nowhere. By then, yields may be much lower.

I stick with my call made two days ago: I Expect New Record Low Long Bond Yield.

Despite all the economic cheerleading about the allegedly strengthening economy, I see things differently. Job growth is shrinking. Average the last two months to smooth out the hurricanes and you get growth job growth of 114,000. For now, it's still positive.

Hooray, autos rebounded. However, 100% of that rebound is due to hurricane replacement. It won't last.

Rental Vacancies Are Rising. What will that do to new apartment construction?

What growth we have is due to a diminishing savings rate . That's another hurricane aspect that won't last.

If the economy was getting stronger, trends in long-term treasury yields would not look like they do.

Mike "Mish" Shedlock

hmk, how's this for size ...

  1. QE works slightly differently in Japan in that only reserves are credited in the bond 'purchase' process, whereas, in the US new bank deposits are created as well so there is a direct boost to money supply in the US but not so in Japan.
  1. In addition, the Japanese have the largest demographic headwind of any developed country -- this is deflationary and counteracts some/all of the inflationary policies in play.

That was 2. :)

  1. I believe in Japan there is a culture that leans toward keeping everyone employed -- companies would be more inclined to run with their deadwood and 'bloat' than follow the aggressive Anglosphere model of hire 'n fire. The staff bloat, along with the fact that Japan is still full of zombie companies (from the heady '90s bust) means that staff wages are necessarily stagnant (with possibly some downward bias).

In any event, I think similar easy money policies in our neck of the woods is going to have a markedly different outcome -- even if the Japanese economy must eventually bow to the laws of economics.

@TheLege. Even in deflation yields can go up. The investing landscape is heavily leveraged. As companies default on loans, leveraged investors will unwind even their safe investments to cover margin calls.

What could possibly happen to make you and Lacy Hunt wrong? Debt is deflationary and it keeps

Since debt is deflationary what could happen to make you and Lacy Hunt wrong? Well Trump picked Powell to head the Fed since he is a low interest rate man. I think Trump is frustrated by his lack of success in trying to impose tariffs on countries like China with whom we have a trade deficit of almost a billion dollars a day. I have to admit it upsets me when people say Trump is crazy because he's going to start a trade war when they can't provide a solution to deal with this very serious issue. So let's say that before he picked Powell he talked to him about this very problem and told Powell that since nothing else has worked, we need to do whatever it takes to take the dollar down not dramatically but nevertheless slowly even allowing for dollar rallies from time to time but the goal has to be down much further than anyone can imagine to reduce the trade deficit to provide a great boost over time to our export markets helping growth and jobs as Americans begin to buy more products here at home as foreign goods become way more expensive. Hopefully it will take a good deal of time before the bond market figures out what is going on, because when it does spreads will widen and as interest rates begin to move up the 35 year old bull market in bonds will finally come to an end. Obviously I'm assuming Powell agrees with Trumps plan and what the Fed has to do to help make it work

Had someone else had written this, I would say-yea well good luck with that plan. Every country in the world wants a cheap currency to help with their economic problems of weak growth, unemployment and interest rates so low savers can't get a decent return on their savings.

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