Secular Bull Market For Treasuies Over? Gold Tells?

Posted by urbandigs

Sun Apr 11th, 2010 10:13 AM

A: If it is, that means an extended period of rising rates for borrowers. I can't help but get that long term 10YR US Treasury chart that Jeff wrote about in late March out of my head. The secular bull market for US treasuries is close to the 30 year mark now and the run was nothing short of spectacular; marked by the culmination of fear in late 2008 sending 10-yr yields plunging down close to 2%! It was the two month period from November and into December of 2008 that saw truly mind boggling moves in the ten year - reflecting the extreme environment at the time. Its timely to discuss this again because about 16 months later, 10-yr yields are now at the same levels they were before that volatile period. Which brings us to whether the secular bull market for US Treasuries is over, issuing in a new stage of end game?

Is the long gold / short treasuries texas hedge the trade of choice right now? With gold showing great strength even as the dollar rises against other major currencies, it should be crystal clear that the precious metal's demand is less of a US dollar hedge thing and more of a hedge against global fiat currencies thing. The comment thread in the last gold discussion over a year ago (I try to limit these discussions to once/twice a year) brought out lots of emotions and arguments supporting the rise of gold as an inflation-dollar destruction hedge only relationship. I tried to explain my view in the simplest terms:

"The gold rise is NOT a US dollar hedge here. Gold is finite, and paper is unlimited. In a world of printing presses, they cant print more gold. Worldwide Govt's/CB's are facing the same severe deflationary winter; and reacting in same way. Runaway Inflation is a dream ways off. Can gold rise at the same time your dollars gain purchasing power? Yes."
Even Soros recently announced a 152% increase in gold holdings as he anticipates the UK to further devalue their currency. It seems to me a rise in yields will likely be accompanied by the surge in gold that many of the gold bugs out there have been waiting for; and at some point it may even get silly/parabolic.

The recent strength in gold prices makes me worry about whether the rise in yields has entered its beginning phase? If so, its something that borrowers will have to adapt to for many years to come. The NY Times discusses: "Consumers in U.S. Face the End of an Era of Cheap Credit":
Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates. The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.” Nine months ago, United States government debt accounted for half of the assets in Mr. Gross’s flagship fund, Pimco Total Return. That has shrunk to 30 percent now — the lowest ever in the fund’s 23-year history.
Clearly the bond king thinks an adjustment is under way for treasury bonds and that the era of cheap money will certainly over; by looking at his portfolio he is putting his clients money where his mouth is. But are we prepared for this? In my opinion, no way! Especially the younger generations that turned into first time borrowers in the past 4-5 years and only know a world of ultra-cheap money. Geez, it was only 8 years ago when I took out my first loan at an interest rate of 7 1/8% and thinking 'I did great on my rate'! My how times changed.

My questions on these topics right now are:

How long can the fed constrain borrowing costs and when will market forces at the longer end of the curve start to behave independent of fed policy?

Is now the time to buy treasuries, in anticipation of a reversal in asset prices after the historic rise?

How will the world perceive $1,500 gold if the precious metal starts to go parabolic? Will we mis-interpret the signal as a hyperinflation threat sending bond yields surging?

If we have an adjustment in treasury yields, will it be fast & furious to the new level or slow & methodical as the fed would like?

The fed ended their US treasury borrowing program at $300bln, surprising the markets when it was announced? Was this intentional and do they see a need in the future to use these final QE bullets to support treasury prices if a selloff does occur?

How will buyers in the fastest and greatest real estate markets in the country react if borrowing costs do adjust higher? At what level will it start to mean something? 5.5%? 6%? 6.5%?

Will Howard Lutnick be proven right on his call of a constraining of treasury yields in 2011 or 2012 as the second wave of the credit crisis hits home - sending yields lower and killing the short treasury bets?

DISCLOSURE - I only have 2 longer dated gold calls right now. I sold my GLD position and shorter term call options about 5 months ago with the hope of buying back in at lower levels. That did not happen and I never got back in. With gold rising as the dollar rises, its just another sign of strength for the precious metal. Watch for a breakout over 1,220/oz or so.

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