Has anyone noticed?

[Scripophilist]

How long bond yeilds are rocketing in the US at the moment. They appear to be in a very sharp upward trend.

Concerning for people expecting low inflation and / or low financing costs. Therefore are we beyond the bottom of the current interest rate cycle?

Have a look:-

30 Y TSY YLD NDX

 

[darrenf]

I've noticed this too recently.

US T-Bond futures have taken a real dive this last few weeks (which is the inverse of the yield of course).

European bonds have fallen too, but not to the same degree as the US.

The long end of the market is now certainly pricing in an upward movement in interest rates.

 

[dsmodi]

Can anyone elaborate on what the above implies please?

cheers

 

[mully]

If it leads to higher interest rates watch house prices and increasing focus on the level of consumer indebtness. However, expect Central banks to fight this development as it would lead to economy failing. Politically not acceptable etc... As Clinton said to US electorate "It's the economy stupid".
The bond market development is potentially critical as business have yet to start spending. Economy, so far, has been kept afloat by consumers re-financing their mortgages. If this comes to end without business kicking in -Oophs!!

 

[RogerM]

Welcome Scripophilist. Anyone recommended by Mr Charts will clearly be an asset here. Your "handle " doesn't appear in my dictionary, but Google, as ever, completed my education .

dsmodi - The fixed rate mortage market is based on long dated government bonds. If long dated govt bond (gilts in the UK) yields rise, then so will long term interest rates. We have a whole generation of borrowers who think that interest rates only go down. I've said before that a 2% increase in interest rates would increase mortgage repayments by 50%. How many are prepared for that eventuality? Even if they are, higher rates will stop any recovery dead in its tracks. The implications of the debt mountain have yet to make themselves felt.

What is confusing me is that normally money comes out of bonds to go into shares. So where is the money going on this occasion as it doesn't seem to be going into stocks. With a weakening US$ it could be that money is being pulled out of the US which doesn't bode well for the US economy - and by implication, the rest of us.

For those approaching retirement with a fund that needs to be converted to income, now might be a good time to lock into an annuity. We have seen a recovery in stock values and annuity rates should have improved with the rising bond yields.

 

[dsmodi]

thanks roger (et al?)

 

[Scripophilist]

Berkshire Unloaded Huge Slug of Treasuries Last Quarter

By TSC Staff
08/09/2003 03:20 PM EDT

Pundits groping for reasons to explain the selloff in Treasuries over the last few months might consider Berkshire Hathaway's (BRK.A:NYSE - commentary - research) second-quarter earnings statement.

Warren Buffett's investment vehicle said it unloaded a portfolio of long-term government bonds worth more than $9 billion before the end of the quarter -- just before rates took off.

Berkshire reported second-quarter earnings of $2.23 billion, or $1,452 a Class A share, more than double the $1.05 billion, or $681 a share, of a year ago. Berkshire's Class A shares have never split and currently trade north of $72,000 a shot.

The company put up $900 million in investment gains during the latest quarter, about $600 million coming from the sale of "virtually all of the long-term U.S. government securities held in Berkshire's actively managed, fixed-income portfolio." The sale added $9.1 billion to Berkshire's cash equivalents, which vaulted to $24.4 billion from $10.3 billion at the end of 2002.

Such sales would barely rate notice in the enormously liquid Treasury market (the U.S. government sold $60 billion in new bonds last week), but for the fact that no money is perceived as smarter than Buffett's. Word that he was in or out of assets in the past has led markets to follow his lead. At the very least, Berkshire's Treasury divestiture is another trading coup for a man some consider the greatest investor of all time.

 

[OpalSky]

Hey Scrip, interesting post.

Do we know what Buffett's doing with the proceeds of the sell-off? Presumably hes only pulling out because he can put the money to more profitable use elsewhere?

OS.

 

[RogerM]

It'll be interesting to see what happens to bonds now after Greenspan's announcement last night. Yesterday's statement made it pretty clear that the Fed Funds rate isn't going up anytime soon, despite the large recent jump in market-traded bond yields, especially on the long end of the yield curve.

Bond yields and stock prices tend to move in sync, although there has been distinct divergence recently. It could be that recently bond yields have just been playing "catch-up". Bond yields should now fall, and in the normal course of events stock prices should fall with them, although it doesn't need to happen immediately.

 

[Scripophilist]

There has been so much focus on the bond market since I posted that the yeild has been bouncing around all over the place. But seems to continue to test highs. I noticed that when the US blacked out there was a rush to buy bonds but that quickly reversed when it looked like there was confirmation that it was not terrorism.