Here’s Why Bond Rates Are Going To Stay Low

• Posted by TheArmoTrader
• on November 6th, 2011

America’s Bond rates are pretty low, in fact, they are at the lowest point they have ever been. Everyone is fast to call the bond market a bubble, yet bond rates have done nothing but go straight down in a nice steady downtrend since the 1981 high of ~15%.  This post will be mostly backed by stats and facts, but first, let me lay some $MACRO reasons on way why I believe bond rates are going to stay low for some time to come (~20 years).

• China is NOT going to stop buying our debt. Why would they? Whose debt are they going to be buying instead? Greece? Good luck with that. Besides that, Foreigners only own about 31% of America’s debt (meaning a super majority of the debt is owned by “Americans”), so China’s not the only bidder in the market.
• There are no bond vigilantes and there will not be any. Shouldn’t they have swooped in by now as bonds prices got to these “frothy levels”?
• America is NOT Greece. The US does not need to resort to austerity like they do. Comparing the two has to be the great fallacious argument in the history of economics (OK, maybe not that bad, but close). Greece’s GDP is 2% of America’s. Not only that, the US  has full control over its fiscal and monetary policies (crucial in today’s monetary system). Greece on the other hand, does not.
• As @TheStalwart explains,  The Costliest Mistake in Economics will continue to be made. Higher deficits will NOT lead to higher interest rates- they have not and that trend will continue.
• Also, as this summer showed us, the argument of  ”Who will buy bonds if the $FED is not buying” is totally erroneous.  Rates dropped even as the US’s credit was “downgraded”.

The Stats

1) Supply and Demand

Its econ 101. If there is more money flowing into bonds (demand), then the price of bonds will stay high, thus keeping bond rates low. Why is there going to be demand? Its because the baby boomers are getting older and are moving away from risk. And what better risk-free asset than US Bonds? I have already made the case that most Americans do not care about stocks, but as the chart below will show you, the opposite is true for bonds. There is consistent and high inflows.

All the while Bond Ownership (Blue line) is not at “Bubble levels”, not even close. You can’t have a bubble when ownership is small.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2) Correlation with Stocks will slowly disconnect.

As we now, bonds have had a strong correlation with stocks. I believe we will start to see this relationship decouple -in fact, we are already seeing some signs of it. On Friday, the S&P 500 index ($SPX) closed at 1253.23 while the 10 year rate closed at 2.06. Just 2 weeks ago, on October 24 when the $SPX closed at 1254.19 (basically the same level), the 10 year sat at 2.23. Going back even further, on August 3, when the $SPX closed at 1260.34, the 10 year sat 2.64. Basically, what im trying to get at is that bond rates are getting lower even as the S&P500 comes back to the same level. If there was truly a perfect correlation, the bond rate would be at approximately the same rate every-time, but its not.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3) Baby Boomers are getting old

Like I previously said, we should see a flight to safety (bonds) and as baby boomers get older. But is this effect really that huge that it would cause bond rates to stay so low? Take a look at the stats yourselves.

More People (as a percent of the total population) have been getting older.

 

 

 

 

 

 

 

 

 

And projections don’t show that slowing anytime soon. Median Age in the US will continue to climb.

 

 

 

 

 

 

 

4) Bond Rates are usually low

Historically, Bond Rates (I am using the 10 year as a middle standard) have stayed low. In fact 75% of the time, the 10 year has stayed  below 5.0%.  So if you expect high double-digit rates, you are betting against the trend my friend (something I do not recommend).

 

 

 

 

 

 

 

 

5) TA – The chart 

There is no reason to be bearish on the chart when it comes to Technical Analysis. We have been making higher lows throughout the 8 years (since 2004). Until this trend breaks, there is no reason to get long term super-bearish on bonds from a technical standpoint.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So in conclusion, not only do sky-rocket bond rates make zero sense MACRO-wise, but based on the facts presented, you cannot even make the argument that we are in a bubble, cause we’re not.

 

Tags: $MACRO, $FED, $ZB_F, $ZN_F, $TLT, $BONDS

 

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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