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What If Bonds Don’t Rally In A Recession?
"Relentless" is probably too strong, so I'll use "persistent" instead.
Given the persistent rise in US yields over the past two months, and the extent to which many observers view the long-end selloff as a function of supply concerns and related reservations about the allegedly parlous state of America's fiscal house, there's now some debate about bonds' capacity to rally in a slowdown.
Certainly, such concerns are warranted, or will at least be excused given investors' rather harrowing experi
H-Man, it seems if a normal curve is in the offing, something has to give on the long end or the short end. And it seems the Fed is in the driver’s seat as to where we go. Cut rates, the short end reprices lower and the long end holds unless it is so bad, there is a flight to safety. No cuts, and the long end has to reprice higher because the economy is running hot. Right now I am in the “cut rates camp” as the rate increases slow the economy which tells me the dot plot is nothing more than a Ouija board about predicting 2024.
Mine may be a simple take, but if stocks do grind lower, bonds at 4-5%–with one more hike in the offing, and “higher for longer” the mantra from the Fed–bonds should rebound. Of course, something like a manufactured government shutdown could easily flip over the Monopoly board, and then who knows where we stand?
I would like to ask a related but different question – why did the Treasury not take advantage of the past decade of low interest rates to extend the maturity of its portfolio of sold bonds?
I understand they can print whatever anyway and that they do have to feed the market all maturities in some required amount (I am old enough to remember the consternation that followed the Greenspan era short lived attempt at discontinuing the 30Y bond…) but surely that would look better for today’s budget?
I wondered the same thing many times. I’m old enough to remember Argentina somehow selling a 100 year bond. (It was redeemed after only 3 years for an average of $0.55 on the dollar).