Monday, August 11, 2014

* Treasury Markets Abruptly Distorted by Monetary Policies

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Monetary policy is confusing.  It's effects are more confusing.  Add to that the reality that the United States is in a state of tightening (reducing bond buybacks (aka QE), discussing rate increases) right as the EuroZone is discussing easing.

"You understand the markets have been abruptly distorted by monetary policies and fiscal interventions and support." - Marc Faber

So, In English, the two central banks are moving in totally different directions.  There's a way to see these "distortions" in the market in a pretty easy way.  We can just look at bond yields.

What used to be a simple rule in finance: Higher Risk requires a Higher Expected Return

This rule is breaking down in the face of semi-barbaric, semi-panic, semi-out of control, semi-confused, semi-contradictory monetary stances. So let's skip the words, and look at a table and a chart, and be done with it.

First, I have included a list of the current 10-year Government bond yields across various countries.

Provided by Bloomberg

See the US 10-year Treasury yield (2.42%) which is the "expected return" portion of our axiom and compare it to the rest of the world.

Here's a fair question that "Super bear Marc Faber" (author of the 'Gloom, Boom & Doom Report) asked today on CNBC (Super bear Marc Faber: A 'rebound is underway').

"What would you rather own a 10-year French government bond yielding something like 1.5% or a 10-year US Treasury yielding 2.42%? You understand the markets have been abruptly distorted by monetary policies and fiscal interventions and support."

Here are government yields in a bar chart.

Provided by Bloomberg

For the record, the following countries show lower expected return (and therefore imply lower expected risk) than the United States:

  • Singapore
  • Canada
  • Hong Kong
  • France
  • Netherlands
  • Germany
  • Japan (special case)
  • Switzerland

Some of this is an over simplification, but a lot of it... really isn't.  Some of this (all of this) was intended, but it will unravel in some way... orderly, disorderly, slowly, quickly... we don't really know other than: it will happen..

Also, a side note, Marc Faber is the perma-bear of  perma-bears... so keep that in mind, as context is always critical.

This is trade analysis, not a recommendation.

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