Bonds & Interest Rates

Breakout in T-Bonds: 100 Years of History tells us if rising interest rates are bullish or bearish for gold

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Posted by Steve Saville - The Speculative Investor

on Monday, 19 March 2012 04:02

This week's downside breakout in the T-Bond futures market and the associated rise in the T-Bond yield has prompted us to re-visit the relationship between gold and interest rates. In the process of doing so we'll address the question: are rising interest rates bullish or bearish for gold?

We'll begin by noting what happened to nominal interest rates during the long-term gold bull markets of the past 100 years. Interest rates generally trended downward during the gold bull market of the 1930s, upward during the gold bull market of the 1960s and 1970s, and downward during the first 10 years of the current bull market. Therefore, history's message is that the trend in the nominal interest rate does NOT determine gold's long-term price trend.


Bonds & Interest Rates

Stress Tests No Sweat - why the Fed is keeping interest rates so low

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Posted by Peter Schiff - Europacific Capital

on Friday, 16 March 2012 07:39

The Federal Reserve ran another "stress test" on major financial institutions and has determined that 15 of the 19 tested are safe, even in the most extreme circumstances: an unemployment rate of 13%, a 50% decline in stock prices, and a further 21% decline in housing prices. The problem is that the most important factor that will determine these banks' long-term viability was purposefully overlooked - interest rates.

In the wake of the Credit Crunch, the Fed solved the problem of resetting adjustable-rate mortgages by essentially putting the entire country on an teaser rate. Just like those homeowners who really couldn't afford their houses, our balance sheet looks fineunless you factor in higher rates. The recent stress tests assume market interest rates stay low, the federal funds rate remains near-zero, and 10-year Treasuries keep below 2%. Why are those safe assumptions? Historic rates have averaged around 6%, a level that would cause every major US bank to fail!

The truth is that higher rates are the biggest threat to the banking system and the Fed knows it. These institutions remain leveraged to the hilt and dependent upon short-term financing to stay afloat. While American families have had to stop paying off one credit card by moving the balance to another one, this behavior continues on Wall Street.

In fact, this gets to the heart of why the Fed is keeping interest rates so low. Despite endorsing phony economic data that shows the US is in recovery, the Fed knows full well that the American economy cannot move forward without its low interest-rate crutches. Ben Bernanke is trying desperately to pretend that he can keep rates low forever, which is why that variable was deliberately left out of the stress tests.


Unfortunately, rates are kept low with money-printing, and those funds are starting to bubble over into consumer prices. Bernanke acknowledged that the price of oil is rising, but said without justification the he expects the price to subside. This shows that Bernanke either doesn't know or doesn't care that the real culprit behind rising oil prices is inflation. McDonald's, meanwhile, is eliminating items from its increasingly unprofitable Dollar Menu. A dollar apparently can't even buy you a small order of fries anymore.

Unless the Fed expects us to live with steadily increasing prices for basic goods and services, it will eventually be forced to allow interest rates to rise. However, if it does so, it will quickly bankrupt the US Treasury, the banking system, and any Americans left with flexible-rate debt.

That is why the Fed feels it has no choice but to lie about inflation. If it admits inflation exists, then it may be pressured to stop it. However, if it stops the presses, it will bring on the real crash that I have been warning about for the past decade. Just as the Fed's response to the 2001 crisis led directly to the 2008 crisis, its response to 2008 is leading inevitably to either deep austerity or a currency crisis.   

[For more on the crisis ahead, pre-order Peter Schiff's latest book, The Real Crash, due out in May.]    

Imagine this scenario:

When the banks fail as a result of higher interest rates, the FDIC will also go bankrupt. Without access to credit, the US Treasury will not be able to bail out the insurance fund - which only contains $9.2 billion as of this writing. So, not only will shareholders and bondholders lose their money next time, but so too will depositors!

Americans are much less self-sufficient than they were in the Great Depression. One only needs to look at Greece to see how a service-based economy deals with this kind of economic collapse - crime, riots, vandalism, and strikes.

There are a few countermeasures left in the government's arsenal, including selling the nation's gold, but there comes a point at which the charade can go on no longer. The sharply widening current account deficit shows that we are becoming even more dependent on imports that we cannot afford. Just as homeowners had a good run pulling equity from their overvalued properties, Washington and Wall Street will soon find the music turned off. And there will be no one there to help them clean up the mess left behind.

I propose a new rule of thumb: until true economic growth resumes in the distant future, the fed funds rate should also be used as the "Federal Reserve credibility rate." We'll use a scale of 0-20, which is approximately how high rates went under Paul Volcker to restore confidence in the dollar. So, until the end of this crisis, if the fed funds rate is near-zero, all the Fed's statements, forecasts, and stress tests should be given near-zero credibility. When rates rise to 5%, the Fed's words can be assumed to be ¼ credible. When they hit 20%, that would be a Fed whose words you could take to the bank - if you can still find one.  

For in-depth analysis of this and other investment topics, subscribe to Peter Schiff's Global Investor newsletter. CLICK HERE for your free subscription. 

For a great primer on economics, be sure to pick up a copy of Peter Schiff's hit economic parable, How an Economy Grows and Why It Crashes.

Bonds & Interest Rates

Are Treasuries FINALLY the Short of the Decade?

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Posted by John Rubino - DollarCollapse.com

on Thursday, 15 March 2012 00:15

For years now, US government bonds have looked like terrible investments, what with those trillion-dollar deficits and multiple wars and all. But Treasuries just kept rising, earning their owners nice returns and making their critics seem like financial illiterates who didn’t know a AAAA credit when they saw one.

Check out the chart for TBT, a 2X negative long-term Treasury ETF (in other words, a fund that bets against Treasury bonds). In case the price numbers are hard to read, this fund peaked at 70 in 2008 and has since fallen steadily if irregularly to less than 20. Far from being the short of the decade, Treasuries, especially if you were using leverage to bet against them, have been a sound-money investor’s nightmare. ...

(Click on image for further reading)


....read more HERE

Bonds & Interest Rates

The Big Swing: US Long Rates? The ball is in China’s court!

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Posted by Jack Crooks - Black Swan Capital

on Wednesday, 14 March 2012 13:03

Watching the rise in US long-bond yields got me to wondering: What if the fall in the Japanese and Chinese current account surpluses continues, i.e. this trend is for real?   

US Current Account Deficit (black) vs. 30-yr US Treasury Bond Yield (blue):    

031412 ca and 30yr

If so, it means both countries recycle less of their yen and yuan, respectively, back into the US capital markets.  It means the global economy could finally see some rebalancing between the major deficit country, the US and surplus country, China.  It means the US current account deficit, which seems to worry many people and economists alike, is likely to improve, as Japan and China morph increasingly into capital importers instead of capital exporters.

031412 GI adHas this rebalancing begun?  We don’t know yet.  But interestingly, given the needs for Japan to rebuild and China to change its growth model, it could very much be the next major global macro trend for the global economy.  If so, there are three major implications, and several investment themes spawned:  

1)     US long bond yields have likely bottomed (price topped), and

2)     The next major growth phase for the global economy will be the rise of the Asian Consumer. 

3)     Global capital and trade flow will become a two-way street.  

Some additional comments:  

  1. Japan may be morphing into a capital importer (first year-on-year trade deficit since 1980 was recorded in 2011).  Interestingly, the tsunami and its devastation may have been the catalyst that leads to a normalization of the Japanese economy, i.e. rising interest rates, local commercial bank lending, and local business investment. 

    -- Because of Japanese nuclear power going offline, Japanese imports of crude oil is up 350% compared to the same month last year.

    -- Normalization is part and parcel to a weaker yen as the game of risk aversion and “hiding” large pools of capital goes away.   

  2. China’s GDP growth will likely continue to fall (inherently reducing its giant reserve surplus), but this will not likely be a disaster if China’s growth model changesto support consumers (enriched consumers don’t care about GDP numbers; they care about reality) and moves away from State Owned Enterprises, which includes massive capital investment projects and consistent export subsidies of companies operating in the red or on wafer thin margins.

    -- No need to recycle surpluses and keep buying US Treasuries in order to keep the currency suppressed, because ...

    -- A stronger yuan will increase consumer wealth, relatively, making the transition to a new model more efficient, i.e. benefiting import industries at the expense of exporters.

  3. Asian-block countries will be relieved if China signals it is serious about making a transition that empowers its consumers. Asian-block nations who have implicitly and explicitly suppressed the value of their own currencies over the last several years thanks to China’s explicit currency suppression and growth model.  Asian-block countries compete against China for the same Western demand.  Thus, in the process of that competition, consumer market development across Asia as a whole has been stymied.  Thus, China’s signaling of a change in its local growth model will likely be reinforced strongly across the region.

  4. Stronger Asian consumer demand and stronger Asian currencies mean Western consumer goods flow more freely to the East and the US trade balance improves dramatically, and it will be quite good for Europe too. Thus, the US trade balance and need for external capital to close the current account gap will decline naturally as Asian consumer demand increases.  

  Risks to this rosy long-term scenario are many; here are just a few examples:  


  • Contagion to emerging markets triggered by the European debt crisis could be severe ...

  • Potential financial crisis in China as debt grows to dangerous proportions and unrest is met with more internal crackdowns on its citizens ...

  • A major debt crisis in Japan, triggered by its need to import funds, but inability to see long-term interest rates rise (which is part and parcel to attracting funds from international investors) ...

  • US remains mired in its seemingly “never-ending” war policy and do little to improve its unsustainable fiscal deficits ...


Net-net if this major trend plays out, it means the US may avoid its fiscal train-wreck destiny and paradoxically if Chinese leaders trust their average citizens more, they will gain even more control of their own destiny.

Bonds & Interest Rates

Charts That Count: Will Canada be the Only Investment Grade G7 Issuer by 2040?

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Posted by Agcapita

on Monday, 12 March 2012 08:49

According to research by SocGen, by 2040 Canada will be the only G7 country with investment grade sovereign debt. By as early as 2030 the US, France, Italy and Japan will all lose investment grade status.  To put this into perspective this means that in less than 2 decades the debt of countries currently representing approximately 50% of global GDP will be ineligible for investment by the smallest municipal pension fund.  

Japan is actually expected to lose investment grade status in less than 10 years and looking at the charts below this should not come as a surprise when it happens. BTW - Japan by itself represents almost 10% of global GDP.

Clearly some profound changes are coming to the sovereign debt markets and most importantly to the idea of the "risk free" rates of return that can be found there. As one wag recently described it, sovereign debt no longer represents "risk free return" but rather "return free risk".


US Budget Deficits - Sustainable?   
Perhaps a picture truly is worth a thousand words.  In this case think of the word "unsustainable" over and over again.


If Greece is Bad What are the UK and Japan?   
The chart below is the total debt as percent of GDP for the 10 largest mature economies.  Greece isn't even worth an honourable mention when placed alongside the truly gargantuan debts of Japan and the UK - on a per capita or absolute basis.


Is Even More Bad News Possible for Japan?   
Sadly the answer appears to be yes.  Deteriorating demographics with the attendant upward pressure on government spending and a move to sustained current account deficits - all in a low growth environment - have combined to create the perfect storm for Japan's fiscal position - its bad and getting worse rapidly.


Agcapita Farmland Fund III 
Farmland increasingly is in the news as more investors come to appreciate the superior qualities of the asset class - including low return volatility, diversification benefits due to a limited correlation to public equities and good risk adjusted returns. Agcapita Fund III is currently open and RRSP eligible. 

  • Residents in BC, Alberta, Saskatchewan or Manitoba - CLICK HERE to be contacted with more info.  
  • Resident in Ontario and an Accredited Investor - CLICK HERE to be contacted with more info.  

The Ontario Securities Commission has a detailed definition of Accredited Investor which can be found HERE. However in general Accredited Investor means:  

  • An individual who, alone or together with a spouse, owns financial assets worth more than $1 million before taxes but net of related liabilities or
  • An individual, who alone or together with a spouse, has net assets of at least $5,000,000.
  • An individual whose net income before taxes exceeded $200,000 in both of the last two years and who expects to maintain at least the same level of income this year; or 
  • An individual whose net income before taxes, combined with that of a spouse, exceeded $300,000 in both of the last two years and who expects to maintain at least the same level of income this year.
  • An individual who currently is, or once was, a registered adviser or dealer, other than a limited market dealer 

Some Quotable Quotes 
Simply for entertainment value if nothing else, here is former Federal Reserve Chairman Alan Greenspan describing the robust nature of the US housing market and the safety of mortgage backed securities - all shortly before the largest financial crisis in history driven by a collapse in US housing prices: 

"I believe that the general growth in large [financial] institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically -- I should say, fully -- hedged."

"Even though some down payments are borrowed, it would take a large, and historically most unusual, fall in home prices to wipe out a significant part of home equity. Many of those who purchased their residence more than a year ago have equity buffers in their homes adequate to withstand any price decline other than a very deep one."

"The use of a growing array of derivatives and the related application of more-sophisticated approaches to measuring and managing risk are key factors underpinning the greater resilience of our largest financial institutions .... Derivatives have permitted the unbundling of financial risks."

"Improvements in lending practices driven by information technology have enabled lenders to reach out to households with previously unrecognized borrowing capacities."

"Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade, though this would not have been the case, of course, had interest rates trended sharply upward."

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