For all those that think markets are always efficient and rational, I suggest they take a look at the current yields on US Treasuries:
3 months .005%
2 Year .92%
5 Year 1.66$
10 Year 2.65%
The lower chart shows the movement in yields over the past 12 months.
Bloomberg reports on market activity
Dec. 3 (Bloomberg) -- Thirty-year Treasury bond yields fell to record lows for a third consecutive day after the Federal Reserve said it plans to make weekly purchases of the debt of mortgage issuers to drive borrowings costs lower.
Yields have dropped every day since the central bank announced on Nov. 25 that it will buy as much as $500 billion in agency and mortgage securities of government-sponsored enterprises including Fannie Mae. Gains accelerated two days ago, when Fed Chairman Ben S. Bernanke said he would consider buying Treasuries and target long-term interest rates to combat a deepening recession.
“They’re going to be buying GSE debt and they’re going to be buying mortgage debt,” said David Ader, head of U.S. government bond strategy at RBS Greenwich Capital in Greenwich, Connecticut, one of the 17 primary dealers that trades directly with the central bank. “That’s the propellant today.”
The 30-year note yield fell one basis point to 3.17 percent at 4:15 p.m. in New York, according to BGCantor Market Data. The yield touched 3.1564 percent, the lowest since the Treasury first started selling the securities in 1977. The 4.5 percent security due May 2038 rose 10/32, or $3.13 per $1,000 face amount, to 125 9/32.
Yields have dropped 119 basis points over the last 21 days, the biggest rally since the stock market crash of 1987. Treasury 30-year bonds yielded about 9 percent in November 1987.
Ten-year note yields fell three basis points to 2.67 percent, near the lowest level since the Fed started keeping daily records in 1962. Two-year note yields were little changed at 0.89 percent.
At the same time the real yield on 10 year treaury inflation protected bonds TIPS is 2.2^% that is a guaranteed after inflation yield ;
The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was 41 basis points. The spread narrowed from this year’s high of 268 basis points in March
The above means that as long as inflation is above .41% the tip will offer superior return to the conventional treasury bond.
A couple of other reference points to put the treasury yields in perspective:
Dividend yield for the S+P 500 = 2.9 %
Yield on ishares 7 -10 Year US Tresury ETF (IEF)duration 6.97 years =3.27%
YIeld on Ishares Investment Grade Bond ETF (LQD) duration 6.7 years = 7.26%
Seems like the words bubble and overshoot need to be applied to the market in US treasury bonds. At least parts of the market exhibit some rationality With the risk free (treasury interest rate at historic lows it shouldn't be surprising that stocks have staged a decent sized rally.
The charts show the ten year treasury yield at left and the s+p 500 at right. Betweem Nov 14 and today the ten year treasury yield went from a high of 4.27 to 2.65. On Nov 21 the sp 500 hit it's recent closing low of 752 and closed today 16.5% higher.
The S+P 500 price movements are shown on the chart is the upper chart at the top of the page.
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