Goldman Sachs says in a note today says that 10-year Treasury yields, trading recently at 3.022%, have stabilized around 3% on both sides of the Atlantic and below the bank’s measures of “fair value”, reports WSJ.
“...we think that the bond rally is close to an end,” Goldman’s bond strategists write.
Goldman sticks with its year-end call of a 3.75% yield on the 10-year.
Goldman has the direction correct but is very low on how high interest rates could go, inflation will really heat up in the second half and put enormous upside pressure on rates.
This reminds me of the conversation that I had on another blog of an Austrian economist. I kept saying that there will be a hole in demand if QE2 ends, and he kept pointing to current BTC and yields. He also said that my statement that much of the demand comes from the fact that there is a guaranteed buyer at the other end (Fed) was completely false.
ReplyDeleteSure, if QE2 ends there will be a short-lived rally in the dollar, but I also think that that will be offset by other currencies rises (esp. the Euro). Also, I do not think that the dollar rally will be anywhere near reaching the lack of demand in treasuries to offset the rising yields. I think that we will see coincident rises in both the dollar and yields at the same time, which goes against what most mainstream economists are projecting, as well as what has happened in the past.
The true market rate is nowhere near what it is today. The rate we are seeing today is a direct result of amount of government debt being bought by dealers hoping to cash in on Fed purchases, why else would BTCs be climbing going into the end of QE2. Further, there are many more that are expecting yields to decrease after the end of QE2 and are thus buying in now to ride the curve downward. Those are the ones that are going to create a big problem if QE2 does indeed end, which at this point seems to be very vague at the moment.
what does btc mean?
ReplyDeleteBTC means bid-to-cover
ReplyDelete