Here in this write up we will cover up the Bond Yield Scenario of US.
Since the explosion of 2008 Housing Bubble the 30 Year & 10 Year Bond Yield went down to their lows.
In simple terms if we try to understand, after Lehman & Bear Sterns debacle people want to play safe and they were searching for safer bets like Risk Free Assets so quite a big chunk of Money being parked in US treasuries. Thenthe US economy started showing some signs of Deflationary spiral because
Demand Falling —– Debt Defaults —– Bankruptcies —– Layoff and Wage Reduction
To cope with this situation Fed Reserve went down on their Target Rate just to 0.25 and since four years no change in policy. Bond Prices increasing pushing the yields down and creating a bubble like situation. Not exactly a bubble but yes anytime the violent correction may happen. Question is WHY?
- 10 Year Treasury Yield trading less than 2 around @ 1.52 (High was somewhere around 14-16 in 1980’s inflation time)
- 30 Year Treasury Yield trading around 2.57
What can cause a sell off in BONDS?
I feel the FED Reserve Target rate could not remain stagnant here at this 0.25 level so it is bound to go up probably after couple of quarters so in 2013 we might see an increase in policy rate. To counter the deflationary signs the US Govt. printed Dollar currency like anything which allows the CREDIT to get flowed in the whole industrial belt. This gives a push to an economy a bit but not to a great extent because of the Unemployment Rate still @ 8.2%. But QE3 can strike anytime possibly in third quarter which really can incentivize the economy and GDP.
This will eventually lead to a fall in Bond Prices and Yields will go up. So I feel parking the money in US EQUITIES is relatively safer than BONDS. Here Dow Jones could get inched higher to the level of 14K.
Even the Conference Board Leading Economic Index (LEI) showed some improvement signs in the month of May & June by rising 0.3% so the Second Half looks bit better of this year for US Economy and US Equities.
Impact on Dollar
After 2008 downturn there was lessmoney in the system so the Value of remaining Dollar just went up and it attracted the tag of Safe Haven in comparison to Gold so “The Value of Currency (Dollar) inching higher continuously”. And moreover the US Dollar is being owned by big foreign economies like China & Japan so the value of Dollar already touched 82 and could go possibly higher probably upto 88-90 (as I predicted in previous article dated 6th December 2011). I am not expecting much higher level because the US Govt.’s printing machineis on its roll so the Value of Dollar will start diminishing after a certain period of time might be after 2013.
The effect of possible downturn in Dollar could bring several changes in the world trade that I will altogether try to cover in my another article.
- Bond Yields could rise upto a certain extent could bring violent sell off (Caution: Stay Away)
- US Equitiesatleast for 6 months is a better option or emerging economies another option.
- I specially cover up this section of US Bonds because if this sell off happens then a lot of money will flow back to Emerging Economies so INDIA could remain a favorite spot.
Disclaimer: In this article all the opinions and predictions are my personal and it has no relevance or connection with any of the report and views of any broking/equity research company.