Where are Long Bonds Heading in the Next Six Months?

[HenryTo]

Please participate in our latest poll: Do you think the yield of the 30-year government bond is going up (i.e. a decline in the bond price) or do you think the yield will go down in the next six months?

[Lubov]

I just hope that rates will go up...
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[nodoodahs]

If one uses a parabolic function of M3 Growth over the last year to predict 10-Yr Yield, and then uses a linear function of FFR Target to predict the error in the first function, one gets a result that works MUCH better on predicting 10-Yr Yield than either FFR or M3 growth by itself. It even correctly predicted 2 of the 8 yield curve inversions. Oh well, no model is perfect (except maybe Milla Jovovich who comes pretty close).

This model shows that a good portion of the gain one would expect to see from the increased FFR has in actuality been negated by the slower rate of M3 growth, YOY. The predicted “bottom” for 10-Yr Yield as a function of YOY M3 growth is actually around the 3% mark, and YOY M3 is now at 3.8%. So if the Fed really wants 10-Yr Yield to go up, they need to either combine the FFR increases with a steadily growing M3, or move M3 growth into a better range, or both.

If the Fed slows M3 even more, raising rates will be little help in boosting the 10-Yr Yield.

[detachedbear]

Long rates stay the same? The variables are difficult even to think about. My guess is that the Fed would like long rates as stable as possible, perhaps even a small decline. If that is true, then they have been quite successful - since long rates are still declining. What happens if something changes? There is huge event risk with possibilities from a terrorist attack to a new war in Iran or North Korea. The present scenario obviously depends on our trading partners, particularly China and Japan. Japan has been fairly predictable. The Japanese love exports and are looking for market share. The Chinese are apparently looking for similar status, but what about their domestic situation? I'm staying away from this one because I think that it depends on the world's confidence in the America system. I think world opinion could change very fast.

[HenryTo]

Okay, I am issuing "go flat" signal for long bonds here at 4.54%!

Slightly over three weeks since my commentary on the fact that "rising rates were not a given." Rydex govt bond assets probably have gotten ahead of itself in the short-run.

In the next two to three months, I don't think the long bond will do too much, unless a huge "flight to quality" scenario emerges.

[HenryTo]

The flight to quality continues. The yield of the long bond is down to 4.53% as we speak.

[HenryTo]

Actually, the commentary was published on the evening of 3/27, and the 30-year U.S Treasuries closed at a yield of 4.84% that day.

[HenryTo]

Yield of 30-year Treasuries when I initially argued that rising rates was not a given and created this poll about the long bond: 4.77%

Today, twelve days later, the long bond closed at a yield of 4.66%.

We will see.

Henry

[HenryTo]

This is the most impressive participantion ever! Keep the votes coming and may everyone have a great weekend!

Henry