E Everyone Said Treasury Bond Yields Would Go Up After QE Ended

9. At least Brad Delong cautions against calling the bond market a bubble but then turns around and tells people to shrink their positions! He says, however, that he is not certain bonds will crash in price, causing yields to rise. But just get out to be on the safe side, he says.

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There are many other articles and warnings and wolf sightings by pundits that are not posted here. But then here are a few articles that show my point, that bonds are in massive demand. Truth is, if the economy slows down, people pile into treasury bonds like always. But now, if the economy heats up, people pile into treasury bonds and that is different than in the past.

So, here are a few articles highlighting the demand for bonds, and believe me, getting people to understand this reality is harder than going to the dentist!

1. Bloomberg speaks of negative interest rates in the repo markets for German bonds as people are desperate to own them. And Germany, while not booming, is not in recession.

2. Bloomberg was on this early, speaking back in 2013 of the bond buffer, where demand for treasuries as collateral in clearinghouses would slow any rising long interest rates (that could actually help the real economy. spurring real lending.)

Bloomberg quoted Ted Leveroni, who said:

“This is going to be a new, very powerful engine that drives demand for Treasuries, so you have to expect it will impact yields. There are a lot of firms out there -- I know because they’ve told me -- that are concerned about having the available collateral.”

So far, he has been proven right. So, we can see all that fear mongering about higher long rates, even though higher long rates would help the real economy but force the government to spend less or raise taxes, is not panning out. If anything, the derivatives market is like the Beatles' Nowhere Man, who sucks everything up like a giant vacuum cleaner. The vacuum is sucking long bonds up in all nations, at an alarming rate, hurting prospects for growth above slow growth in the real economy.

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This state of economic affairs makes the libertarians and gold bugs go apoplectic. But the libertarians wanted deregulation. Mike Shedlock believed regulation would not ever work, but Glass-Steagall worked for decades, and it was passed when the government had more power than the banks. Eric Holder's sorry career was proof positive that bankers gained more power than the government. The government was too weak to stop them.

So now the deregulation has led to a derivatives totalitarianism, where the bonds are prisoners of demand in a market Mises and his modern friends never knew could come into existence, and the libertarians cannot figure out what happened. They got what they wanted, deregulation, only this is not what they really wanted. No one really wanted it except Alan Greenspan and his friends.

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I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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Gary Anderson 5 years ago Author's comment

Author note: Even with banks artificially goosing yields based on the new auction lawsuit as reported by Bloomberg, yields on long bonds are low and actually should be LOWER.