Sunday, May 6, 2012

David Rosenberg - The 3-D's Deflation, Deleveraging and Demographics

Here is an interesting side note. What correlates with bond yields?
88% Fed Policy
75% Core CPI
64% CPI inflation
With the Fed keeping yields at zero through 2014 there is NO rate risk in owning bonds. When bond yields jump up for any reason it is a buying opportunity UNTIL the Fed starts taking the punch bowl away.
Historically, the average yield curve spread between the short and long dated maturities is about 160 basis points. Currently, that spread is about 330 basis points. That spread will revert to the average over time which means that the long bond yield is going to 2%. Buy Bonds and you will get a better return than owning stocks with dramatically less risk.
Read it at Zero Hedge
The 3-D's Deflation, Deleveraging and Demographics
By David Rosenberg
(h/t Lance Roberts of Streettalk Advisors)

In Treasury Yields Low for Good Reason, I noted that “interest rates are a function of the expected rates over that time period.” From this perspective it should be no surprise that bond yields are highly correlated with Fed policy. With GDP and job growth slowing, the Fed is likely waiting for stocks to take a dive before going ahead with QE4 (Operation Twist was QE3). In my Predictions for 2012 I suggestedthe Fed will move its forecasts for the first interest rate hike out to 2015.” Yields will drift lower in response to that change, hence Rosenberg’s long bond yield target remains a reasonable expectation for bond bulls.

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