In this video interview with Marc he suggests that markets could push rates higher regardless of what the FED does. So far, the FED has been winning the war with the markets as it throws liquidity into the banking system. And as Marc observes, little has trickled into the real economy. Raising the question as to whether the bank bail-outs are still on-going?
Are Bonds in a bubble? Let's try some simple calculations assuming that in ten years rates will normalize back to 6.4% and inflation averages a modest 4.2% over this period. We will use 30 year treasuries that are currently yielding 3.2% on a simple interest basis.
Cash yield from $10,000 Bond @ 3.2% = $320
Inflationary cost of holding @ 4.2% = $420
Principal loss due rate mean reversion = $500
EXPECTED LOSS HOLDING IN 10yrs = $600?
Wow! This means on a simple interest basis, the bonds pay a negative 6% a year, assuming a modest inflation rate and a return of interest rates to normal levels. This may be a best case calculation, as higher inflation rates are more likely to occur, with the pundits expected shortages in key raw industrial materials along with the climatic impacts on food and water costs.
Anyway, something to think about along with using shorts on Bonds as an inflation hedge. Hmm.
Dr Peter G Kinesa
March 15, 2013