PIMCO Admits: Betting Against Treasurys Was a Mistake

September 1, 2011 · Posted in Investing · Comment 

I have been consistently bullish on US Treasurys.

PIMCO now says that betting against US debt was a mistake:

Showing a more bearish view on the U.S. economy, Gross said PIMCO had initially dumped all of its U.S. debt holdings in March as he expected economic growth to be higher, resulting in inflation down the road.

That decision greatly undermined the performance of PIMCO’s Total Return Fund. As Treasuries prices rallied, the fund lost 0.97 percent in the past four weeks, while the benchmark Barclay’s U.S. Aggregated Bond Index rose 0.23 percent in the same period, according to Lipper data.

So far this year, the fund has returned 3.29 percent, less than the 4.55 percent recorded by the Barclay’s benchmark index.

“When you’re underperforming the index, you go home at night and cry in your beer,” the Financial Times, in its online edition, quoted Gross as saying. “It’s not fun, but who said this business should be fun. We’re too well paid to hang our heads and say boo hoo.”

Gross, who oversees $1.2 trillion at PIMCO, said it was “pretty obvious” he wishes he had more Treasuries in his portfolio right now.

Like I’ve said many times before, I think Treasury yields will stay low for much longer than people expect. Global flight to safety, over indebtedness, credit deflation or rather outright deflation, recessions, depressions … all these are bullish for cash and near-cash assets (of the world’s reserve currency), such as Treasury Bonds/Notes/Bills, and of course the mother of all cash … gold.

PIMCOs announcement above may be a nice contrarian indicator to get out of Treasurys for a little while … but then why would you want to daytrade such an investment … relax :)

S&P Downgrades US National Debt

August 5, 2011 · Posted in Government · Comment 

Word came in that Standard & Poor’s just downgraded US Debt:

Credit rating agency Standard & Poor’s on Friday downgraded the United States’ credit rating first time in the history of the ratings.

The credit rating agency said that it is cutting the country’s top AAA rating by one notch to AA-plus. The credit agency said that it is making the move because the deficit reduction plan passed by Congress on Tuesday did not go far enough to stabilize the country’s debt situation.

A source familiar with the discussions said that the Obama administration feels the S&P’s analysis contained “deep and fundamental flaws.”

The fact that the recent debt deal didn’t accomplish anything other than smoke and mirrors is so obvious that I don’t think S&P’s pointing it out will catch anyone by surprise. However, whether or not the agency would actually take the step to downgrade is certainly an interesting event. There surely is a reason they picked after hours on Friday for this announcement.

It’ll be interesting to see how the Treasury market reacts. So far it’s always been a big yawn and actually no curtailment in Treasury buying whenever any of the big rating agencies warned about the outlook for US debt.

It is pretty apparent that a lot has to go wrong before the US government dares to default on interest payments for its national debt. So fundamentally I still see strength in this investment vehicle.

However, now due to this new rating certain institutional investors will actually have to drop US debt and shift to other assets.

How much this effect will counterbalance the global flight to safety into the Dollar and thus into Treasury bills remains to be seen.

Up to this point I have been consistently bullish on Treasury Notes and Bonds and they have done well over the past 3 years for sure.

It is certainly possible that global flight to safety will counterbalance an institutional selloff in Treasurys. However, it is also possible that this recent move will mark an end to the 30 year long bullish trend. Just intuitively, I see a 60/40 likelihood for both scenarios, respectively.

In the latter case, expect gold to soar even more.

Long Term Treasury Securities – Foreign Demand Rises

August 17, 2009 · Posted in Investing · Comment 

As deflation continues to run its course, debt destruction goes on, and people seek save haven investments Foreign demand for long-term US securities rises:

Foreign demand for long-term U.S. financial assets rebounded in June even though China and Russia trimmed their holdings.

The Treasury Department said Monday that foreigners purchased $90.7 billion more in long-term U.S. securities than they sold in June. That’s a significant rebound from May when they sold $19.4 billion more than they purchased.

“There is little evidence in recent (Treasury) reports to suggest that foreign investors are growing weary of buying U.S. securities,” Jay Bryson, a global economist at Wells Fargo Securities, wrote in a note to clients. The increased appetite for Treasury securities was partly because their yields rose in early June, he added.

The Treasury is auctioning record amounts of debt to cover what it estimates will be a $1.85 trillion budget deficit this year. If overseas buyers don’t continue purchasing U.S. debt, some economists worry that would mean falling demand at Treasury debt auctions and rising interest rates.

China, the largest foreign holder of U.S. Treasury securities, trimmed its holdings, to $776.4 billion in June from $801.5 billion in May. Russia also reduced its holdings 3.7 percent to $119.9 billion in June.

China’s holdings are a direct result of the huge trade deficits the U.S. runs with the emerging Asian power. The Chinese take the dollars Americans pay for Chinese products and invest them in Treasury securities.

American manufacturers argue that gives China unfair trade advantages by keeping the dollar overvalued against the Chinese currency, which makes U.S. goods more expensive for Chinese consumers and Chinese products cheaper here.

Both the Bush and Obama administrations have argued that China should allow its currency to rise faster in value against the dollar, but the yuan has stopped appreciating against the dollar in recent months.

Japan, the second largest holder of U.S. Treasury securities, increased its holdings 5.1 percent to $711.8 billion in June. And the United Kingdom, the third largest holder of Treasuries, increased its holdings nearly 31 percent to $214 billion.

Foreign governments purchased $22.5 billion of Treasury bonds and notes, the department said, after selling $21.8 billion in May. Overseas governments sold $5.9 billion in bonds issued by mortgage giants Fannie Mae, Freddie Mac and other government agencies.

Private foreign investors purchased $78 billion in Treasury bonds and notes in June, the department said, up from sales of $800 million in May.

Today yields on ten year notes are currently at 3.49 percent. I am still as bullish as I have been before on Treasury Notes and Bonds:

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Just recently someone commented as a response to my post on consumer prices:

Bullish long term treasuries?

If so, I think your arguments should directly go to the trash.

Even though private lending is not increasing, it is currently being replaced by government debt or money. Yes stocks are risky, but the dollar is even riskier.

Maybe I am wrong and there is a flaw in my thinking. If so, then nobody has successfully pointed it out yet. Statements like the above reflect the commonly spread notions of the public who does not like to bother with details and easily falls for simple platitudes. This just reaffirms my beliefs. But we shall let reality be the final arbiter. I believe that Treasury yields are headed lower for the remainder of this year.

As far as my thoughts on the Yuan:

In 2005 the Chinese government ended the peg against the US dollar and switched over to a currency basket. From 2005 though June 2008, the value of one Dollar dropped from RMB 8.28 in 2005 to about RMB 6.83 by June 2008.

Since then, it seems, the fall of the dollar has stopped and the Yuan/Dollar exchange rate remained suspiciously stable. This has gone on through right now. The chart below illustrates this:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Gold, Silver, Treasurys – A Snapshot

July 13, 2009 · Posted in Investing · Comment 

Gold & Silver

In December 2008 I called for a bottom in Silver. From then through June it has risen from $10 to almost $16 Dollar per ounce, a 60% gain. Then, on June 7th I advised caution on Silver and recommended to cash in and buy at new lows. Since then it has dropped from near $16 to around $12.50.

Below you can see a summary of my predictions in the chart:

Silver Chart
Click on image to enlarge.

I also said in that post from June 7th that gold should do fine. Gold has remained comparatively stable since then. While silver dropped by about 15%, and the S&P500 by about 6% gold fell by only 4%:

gold-vs-silver-07-10-2009
Click on image to enlarge.

Monetary commodities, such as gold and silver should act well during a deflation. Why? Because during deflation cash is king. And gold is the king of all cash.

The problem with silver is that it acts like a hybrid between a monetary and an industrial commodity. It is hard to discern how many people are invested in it for the wrong reason, namely inflation. (Yes, I am talking to you Peter Schiff :) ) But in cases when it is so obvious, when false inflation fears scream at you, it is pretty easy to figure it out.

Once those are washed out and people are back in reality mode, silver should continue to act well along with gold. Silver may be an attractive addition to portfolios again at this level. But I would advise caution. For the time being gold remains preferable. In fact, gold has outperformed both the market and silver since October 2007.

As far as gold/silver mining stocks are concerend, the ^HUI index continues to hold the line and another upward wave may be due now:

hui-as-of-july-10-20091

Treasurys

Treasury Notes and Bonds are the ultimate deflation investment. Why? Because during deflation cash is king. And Treasury securities are the safest possible claim to cash at interest. Why? Because the government can always (and will) tax and loot the people to the hill to pay off its debts if it needs to.

(Remark: Contrary to what some people tell us, the US government can NOT print money to pay off its debts. True, the Fed can print money to buy NEWLY ISSUED government debt that may or may be used to pay off older debts. But that doesn’t make the debt go away. It merely refinances old debt. It is the exact opposite of printing money to pay off debts which is, for example, what happened in Weimar Germany and in Zimbabwe and precipitated hyperinflation. It is crucial to understand this causality. Again, to those who don’t fully understand this yet, I can only recommend reading my post Inflation & Deflation Revisited.)

Back in November 08 I called for significantly lower Treasury Yields between 2% amd 2.5%. They then fell from 3.09% to just below 2.5% in January 09. I then expected for technical reasons that they will move higher to the upper end of the range which would be around 3.3%. They actually overshot and went as high as 3.99%. I then said that Treasurys are a good call again. Yields have since then fallen to around 3.30%:

10-year-treasury-2009-july-10

Click on image to enlarge.

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.