A collision between bonds and commodities was inevitable. The former are being created at a parabolic rate by the US Treasury, and the latter have been crushed over the past 120 days. I’ve been writing and twittering about this trend for some time now. The Treasury has no plans to ease up on their supply of paper, and meanwhile, oil below 100.00 has triggered production cuts at every level down to 55.00. It’s clear that much of the world’s capital has been herded into cash and treasuries, and it was just a matter of time before an exhaustion level was reached.
That signal came today, with a very poor auction of 30 Year bonds. Que sorpressa. Every blogger from James Hamilton to Brad Setser to Paul Kedrosky and even Randall Forsyth at Barron’s has started to sing loudly about the expansion of the FED’s balance sheet, and the explosion of Treasury supply. Personally, I thought a few more months would have to pass, before treasury auctions started going badly. But in a time when markets have started to move faster, I suppose there was no need to wait before the inevitable rejection of bonds took place. As always, this trend change will be fought and doubted. And maybe, just maybe, it will indeed take until 2009 before treasury bond auctions are seen as trainwrecks.
But the issue that’s now been put into play, in my view, is how should an investor cope with a low cash rate world at a time when too much capital is equally hiding in Treasuries, and there is still systemic risk, and tail risk coursing through the system? I don’t have the answer. I will say this: an 8.00% dividend yield on a European integrated oil company was starting to look like the gift of a lifetime, compared to a yield of 3.80% on a US Treasury, and that was exactly the subject of a phone conversation I had with a close friend this morning.
It’s often been the case, I’ve found, that such morning conversations recieve answers in the coming trading day. And that was certainly the case today.
-Gregor
