Long Bond Indicator

From Bloomberg:

U.S. Long Bond Becomes Bellwether as Fed Drives Trade

“The 30-year, with minimal Fed involvement, will become the bellwether issue for the bond market’s outlook on the economy and inflation,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

Trading in Treasuries due in 11 years and more tripled since July, compared with a 60 percent jump for all maturities, according to Fed data. Volume reached $65.7 billion in the week ended Nov. 10 among the 18 primary dealers that trade with the central bank, the largest amount since at least 2001.

The rise in 30-year yields to a six-month high of 4.42 percent on Nov. 15 shows traders expect Fed Chairman Ben S. Bernanke will head off deflation, which can stall recoveries by curtailing spending and investment, said Rohit Garg, an interest-rate strategist in New York at BNP Paribas SA.

Fed officials lowered their forecasts for economic growth at their Nov. 2-3 meeting, projecting an expansion of 3 percent to 3.6 percent next year, down from 3.5 percent to 4.2 percent estimated in June, according to the minutes released Nov. 23. The 2012 forecasts of 3.6 percent to 4.5 percent growth compare with the earlier projections of 3.5 percent to 4.5 percent.

Monetary policy is totally ineffective,” said Lacy Hunt, executive vice president at Austin, Texas-based Hoisington Investment Management Co., whose Wasatch-Hoisington U.S. Treasury Fund is buying bonds and zero-coupon securities. “The problem with the economy is excessive indebtedness. There’s lack of balance sheet capacity of the banks to make loans and there’s lack of balance sheet capacity for the borrowers to take on additional debt. Ultimately we’re going to deflation.”

The long bond served as a benchmark for governments and companies selling long-term debt since the Treasury began regular sales in 1977 until 2001, when then-Undersecretary for Domestic Finance Peter Fisher suspended auctions, saying they were too costly. Investors turned to the 10-year note as the market benchmark.


Traders remain under the mistaken impression that deflation will be avoided, there will be a substantial economic recovery, and therefore bond yields will rise. The reality is the US has much in common with both Greece and Ireland. Bond yields may indeed rise down the road, but it will be due to the fear factor associated with default rather than economic recovery.

Ten points to Lacy Hunt. She understands that the US problem is too much debt. Her call of deflation is completely accurate. We can not have inflation in an environment where the amount of credit is shrinking due to weak bank balance sheets of both banks and consumers.

We should remember that historically, gold performs well in times of deflation.