One of the major facts this week on the markets that I've not discussed yet is definitely the govies bonds yields hitting record lows (meaning bond prices increase as they are inversely proportional to yields). In particular in the long term part of the curve, the 10-Y bond yields in the US, UK and Germany are now all below 3%. The causes of such a strong bid are likely to be sought among a list well covered by the press and the analysts : fear of double dip, safe haven bid, prospects of deflation and Central Banks rates close to zero for a more "extended period" than initially expected,… In the UK, the comments from Martin Weale, the newbie at the Bank of England's monetary policy committee (MPC), that the UK faces a "real risk" of a second recession definitely helped the move down. It looks like the guy hasn't completed yet the "Master the impact of your Rhetoric" course of the BoE induction pack… On the US side, the QE-light seemed to have had an impact on the move too, not only due to the mechanical impact of the purchase by the FED but also because it looks like it has not worked as expected, the markets slumped since it was announced pushing higher the bid for the Treasuries safe haven... We'll see what happens later today at Jackson Hole (weird name)...
The main question now is whether these low yields, say sub-2%, will last for a while or not and all the participants to this debate are comparing the situation with the example of Japan, where the yields have been low for 13 years. The 10-Y Japanese yields from 1990 to now are shown in the chart below, what's interesting to notice is the yields remained pretty "high" in 1995 while the Japan had already slid in deflation, now the deflation looks already discounted... big time I'd say.
I've to confess that so far I've no particular view on the matter, I think it's being played out now with the decisions of the Sheriffs, governments and Central Banks, and their actions (or inaction) in the near future will be key in the final outcome. Once again we're in the growth vs austerity debate (or “fight the deflation vs fight the inflation” or “double dip?” debate whatever name you prefer). To take 2 extreme points of views on the yield topic, both very pessimistic but different regards to prospects of Govies yields, I'll quote on the one hand Albert Edwards, the Natural Born Bear from the previous post, who forecast (along with a SPX at 450...) "yields on 10-year Treasury bonds would fall to the 1.5%-to-2% range and that German 10-year bonds would break below 1.5% while U.K. government-bond yields would fall below 2%." and on the other hand Nassim Taleb, the "Black Swan" guy, who thinks that "every human" should short U.S. treasuries, for him it’s a no-brainer. “By staying in cash or hedging against inflation, you won’t regret it in two years". We'll see. For the time being on the topic I'd recommend the reading of this interesting article from the Economist : A Bull Market in Pessimism and to keep in mind what happened in Japan, the chapter "Japan's trap" of Krugman's "the Return of Depression Economics and the crisis of 2008" (I'm currently re-reading it myself, eat your own soup)
One last thing, I took (for the time being) my profits close to 85 as US GDP was slightly better than the revised expectations (1.6 QoQ annualized vs 1.4 expected) on my long USDJPY initiated near 84, way before I initially wanted to (target at around 88). The thing is when I initiated my position the market was pricing that there will be no intervention after the officials comments disappointed. Today the crowd seems to have turned and to wait for the intervention, particularly after Kan said they were ready to take "bold" action, so my contrarian argument, which went against my usual technical considerations, is not valid anymore. The other thing as well is I wanted to enjoy peacefully this long weekend (Monday is a bank holiday here in London), I can still get back on the position next week if the move above 85 is confirmed. The last thing is the contrarian side of the deal now seems to be on the short side of the pair, the same as the technical arguments.
We'll see... For the time being, have a great weekend my Fellow Traders, TLofT be with you.
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FYI As this post is published: SPX 1053 // SX5E 2609 // NKY 8991 // DAX : 5922 // EURUSD 1.2715 // USDJPY 84.95 // XAUUSD : 1239
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