The US 10 Year and really, yields around the world, have plummeted to levels no one thought was possible. However, the unthinkable has become thinkable. I believe the US 10 year is likely only a week or so from 0.500 and if the Fed cuts rates again this month (as is likely), we could see 0 by the end of the month.
The real question though is will the 10 Year stop at around -0.150 or will it continue to fall? Only time will tell, but the near-term target is 0.000. In reality, it is very possible we can overshoot the lower trend-line to a whopping -1.000 or lower if the global economy shows no signs of any sort of stabilization and the virus continues to drag on and worsen.
As we move into 2021, yields will likely stabilize and rise, however, this will not be a good thing. Contrary to other recessions and down-turns where the dollar actually rose, in this impending recession, the dollar (DXY) will fall (tank), Gold will go parabolic, and more worrisome, other commodities could eventually spike given the fall of the dollar. That means we could see a surge in inflation eventually, as fiat currencies lose their value as a result of negative rates.
We are certainly entering unprecedented territory and investors must hedge against this unprecedented time by investing in Gold. At this present time, the only equities to seek out are high quality dividend stocks with a history of multi-decade dividend hikes. My favourite in this environment are utility stocks, such as Fortis, which has incredibly high stability and a whopping 46+ year dividend hike increase.
This is not the time to be dip-searching because equities have still a long way to fall and still trade at 17-18x forward P/E representing still at-least a 10-15% overvalued market. At some point, the SPX will test the 2600s and we all better hope that level holds or we will see panic like we never thought would be possible again.
Under no circumstance can equities have a sustained rally (that doesn't fade) until the 10 year hits at-least the +1.000-1.250 level which could months or years away.
- zSplit
PS: Once the US 10 Year hits 0, there will likely be some sort of massive algorithmic sell-off waiting to pounce; investors should have SLs ready for this.
Thank you zSplit, your opinion please on a couple of questions :)
1) Thoughts on 50- and 100- year bonds to be issued?
2) Would TLT be a recommendation at this time and what trajectory do you see it heading?
50 and 100 year bonds are somewhat of a cute gimmicky way of the US treasury to refinance their 22 trillion dollar debt at lower rates. I don't believe this exist yet, but they have been 'talking about it'. I imagine they wouldn't introduce this until rates are 0. Moreover, this is likely why Trump wants negative rates so they can refinance 100 year bonds at low interest and essentially inflate the US debt away which is about the only solution left at this point. Its not really a good or bad thing, but rather, a ridiculous result of where we have come.
Bonds will still a buy until basically they aren't. Eventually, yields will rise (not because the economy is getting better) but because people will eventually lose faith in governmental treasuries. It's impossible to know when that is, but it will happen - I would estimate that once the US dollar starts to get below 75-80 you may start to see this. That being said, I don't yields increasing anytime soon so TLT would be a buy. You can also play US treasuries by investing in the leveraged ETF: TMF.
- zSplit
studentcar11
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@zSplit, Detailed and nuanced, classic zSplit...thank you!
studentcar11
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@zSplit, Just coming back to your post- prescient in regards to the SPX 2600 breach (and then some!). Where do we go from there in the near term?
CopperMaiden
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Good Info!
Pakling
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Thanks zSplit for your quality analysis as always.
Do you the surplus USD will also flow to HKD, because of higher (and still positive) % yield and strong peg (meaning almost no forex risk)?
Have a great weekend, cheers!
PaulDeep19131
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@Pakling, No problem! Its unlikely any appreciable money would flow into HKD as its not seen as a safe-haven which is why emerging markets have higher yields than industrialized nations for really that reason. The real safe-haven will be Gold. Only for now is the safe-haven US treasuries but in the next few years that will end.
1) Thoughts on 50- and 100- year bonds to be issued?
2) Would TLT be a recommendation at this time and what trajectory do you see it heading?