Wednesday, January 14, 2015

Nine Reasons Why Bond Yields Are Falling (excerpt)

The 30-year Treasury auction today is likely to price the bonds around 2.50%. During the auction on November 13, 2014, the yield was 3.09%. The price of these bonds is up roughly 10% since then.

The 10-year bond yield was 3.00% at the end of 2013, when the widespread consensus was that it would move higher in 2014 because the Fed was expected to taper and terminate QE3. There was also some chatter about a “great rotation” out of bonds and into stocks. The 10-year yield is now down to 1.92%.

Last year, in the 5/8 Morning Briefing, I discussed nine reasons why yields were falling rather than rising using the following headings: “Bond shortage,” “Portfolio rebalancing,” “Bond fund inflows,” “Fed still buying,” “Yields plunging in Europe,” “Inflation remains subdued,” “Global growth is slow,” “Ultra-easy monetary policy,” and “Safe Havens.” These factors continue to drive yields lower. They also make stocks, especially dividend-yielding ones, look more attractive.

I won’t be surprised if the 10-year yield retests its 2012 low of 1.43%. In this scenario, the 30-year yield could fall to 2.00%. Yields on 10-year government bonds are already much lower overseas: Japan (0.28%), Germany (0.48), France (0.76), Sweden (0.81), and UK (1.58). Previously, I’ve shown that the trend in the bond yield has been highly correlated with the trends in both inflation and the Age Wave, i.e., the percentage of the labor force that is 16-34 years old. The latter two variables remain bullish for bonds.

Today's Morning Briefing: Accentuating Some Positives. (1) S&P 500 remains near record high despite drop in Energy stock prices. (2) Small business owners are feeling very good. (3) Lots of job openings. (4) FOMC voters Williams and Lockhart are patient men. (5) Nine reasons why bond yields are falling in US. (6) Bond yields falling worldwide. (7) China’s exports showing more life than China’s imports. (More for subscribers.)

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