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There are a lot of reasons why I’ve hated long-term bonds of all stripes for more than a year.
Lackluster auction demand from traditional, foreign buyers of our bonds; the increasing dysfunction in Washington, which raises the risk of more credit-ratings cuts; the long-term risk of inflation, which erodes the value of the fixed coupon payments you get from bonds.
And domestic bond fund and ETF selling. That last one is a doozy, by the way, with the latest figures showing that bond dumping continued into October. We’ve now seen five straight months of net outflows — totaling more than $128 billion.
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| Investors have pulled more than $128 billion out of bonds over the past five months. |
But one key reason is also relatively simple: Where’s the crisis that requires crisis-era policies? There simply isn’t one, no matter how much the Federal Reserve apologists try to justify the most aggressive quantitative easing since the 2008 crash.
Look at initial jobless claims. Look at job creation. Look at GDP growth, or confidence, or anything else. None of these economic indicators are near or at the depths seen in 2007-2008 when the economy and credit markets were crashing.
Then there’s the ISM manufacturing index, a benchmark survey of economic activity that has been conducted since 1948. This is no minor report, it’s right up there with the monthly jobs survey in terms of importance. And the story it’s telling is very important as far as I’m concerned.
You can see that the ISM rose to 56.4 in October from 56.2 in September. Not only did that beat expectations for a decline, it was also the highest level going all the way back to April 2011.
Moreover, it’s entirely consistent with the kinds of readings we’ve seen over and over again during economic expansions. Those were periods when the federal funds rate was running in the mid- to high-single digits, not a range of 0 percent to 0.25 percent, and when the Fed wasn’t doing any QE, much less $85-billion-per-month.
It’s not just manufacturing that looks OK, either. The ISM Services index rose to 55.4 in October from 54.4 in September. That beat expectations, too, with both the production and employment gauges improving.
Now, it’s not like I’m a raging bull on economic growth. I think we still face plenty of challenges, especially over the longer term. But there is no economic justification whatsoever for the current pace of QE or the current level of interest rates — and that is yet another reason why the “no taper till kingdom come” argument is all washed up.
So if you haven’t dialed down your fixed-income exposure, don’t wait any longer. Bonds remain largely a sucker’s game as far as I’m concerned. The only things you should consider in this rising-rate environment are shorter-term securities or funds with minimal durations and average maturities, or investments like floating-rate notes. You can find more details on these kinds of alternatives in my Safe Money Report.
Until next time,
Mike
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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If everyone is dumping bonds,then,maybe that's the reason the Fed is buying.If no one buys them,interest rates go up,causing housing to falter,govt interest payment to rise and probably,a decline in the economy.I think,the Fed is just doing what it can,to keep the Titanic afloat,a while longer,hoping something bails out the economy.Everything govt does,in this country,is only for the short term.There is no long term plan.No politician,like Obama,wants to be in office,when the ship sinks.Better to get it past their administration,before it sinks.
"…Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a "normal" level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 25 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA. Already, Bank of New York Mellon Corp. has imposed a 0.13% charge on large deposits.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and was $2.535 trillion in May 2013. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, When the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the clams of Ron Paul and Rick Perry to the contrary, the effective or true money supply has fallen drastically over the last few years…."
http://seekingalpha.com/article/1514632