If Treasury Yield's stay low.....then what?

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thethinker
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If Treasury Yield's stay low.....then what?

Post by thethinker »

In a hope to better understand the relationship between Treasury Yield and how that might be good or bad for those who are savers can anyone tell me a bit more about this question please:

What would it mean for other investments such as bonds and the US Stock Market, if the Treasury Yield's continue to stay low for many more months or even years?
steve_14
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Re: If Treasury Yield's stay low.....then what?

Post by steve_14 »

If treasuries remain at current levels of return, I'd expect everything else to also, so stocks will rise at the rate of earning growth. If rates rise unexpectedly, I'd expect stocks to change in value to offer higher rates of return as well. This could be achieved by a combination of a) Earnings up and/or b) Prices down. Note that these are my expected outcomes. Actuals will surely be higher or lower.
dl7848
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Re: If Treasury Yield's stay low.....then what?

Post by dl7848 »

thethinker wrote:In a hope to better understand the relationship between Treasury Yield and how that might be good or bad for those who are savers can anyone tell me a bit more about this question please:

What would it mean for other investments such as bonds and the US Stock Market, if the Treasury Yield's continue to stay low for many more months or even years?
I'm always fascinated by the Japanese example because the "savers" were confronted with the same question you were asking. Since they were savers, they didn't trust equities, and rightly so in the case of Japanese stocks which had two decades of esssentially nowhere-to-down returns (unless one had bonds and had a rebalancing strategy). So these savers -- in particular, Japanese housewives (not a derogatory term, that's what they called themselves) -- started what became known as the "yen carry trade". They borrowed money in yen at cheap rates and invested it in Australian and New Zealand bonds and currencies that were paying a higher interest rate. Pretty soon the hedge funds got wind that these "Japanese housewives" were getting a free lunch, so they joined the party. :D

Just a fun story, not investing advice.
Tanelorn
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Re: If Treasury Yield's stay low.....then what?

Post by Tanelorn »

At a very high level, the pricing of long term assets like stocks or long term bonds depends in part of the expected future interest rates (risk free alternatives available in the future). The market prices some chance of future hikes in rates, but if those don't happen or when those hikes start seeming less likely, the assets that depend on them will revalue. Stocks and long bonds should rise, in the same way both would fall if rates were raised (or seemed more likely to rise than present expectations).
richard
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Re: If Treasury Yield's stay low.....then what?

Post by richard »

Continued low yield on treasuries likely means continued low yield on bonds generally. If yields rise, you'd get an initial lowering of principal value, but higher returns over the longer term.

The likely effects on stocks are less certain. The value of a stock should be the discounted present value of future cash flows, so all else being equal lower interest rates means a higher discounted present value. On the other hand, rates are low because the economy is slow, which is usually bad for stocks, at least, worse than expected economic performance is bad for stocks. This later part would require you to know what expectations are embedded in current prices and how that would compare to continued low rates. A slow economy with low employment reduces employee bargaining power, lowering wage costs and raising margins - this might outweigh the lower revenues from a slow economy. Lower rates, all else equal, lowers the dollar in foreign exchange, which is good for exports and balance of trade, which can help the economy (unless the resulting higher wages and other costs outweigh the increased sales). Also, are rates low because the Fed is trying harder than expected to stimulate the economy or are rates low because the economy is slow and the Fed isn't trying very hard? How about nominal v. real rates?
Call_Me_Op
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Re: If Treasury Yield's stay low.....then what?

Post by Call_Me_Op »

Few people realized back in 2008 that the impact of what happened would loom large (perhaps) decades into the future. I'll consider the recession over when money market funds break the 0.01% mark.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
billyt
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Re: If Treasury Yield's stay low.....then what?

Post by billyt »

What we are trying to recover from here was a banking crisis, not a business cycle recession. This is a very different animal. The recession has been over for some time now. The effects of the near collapse of our banking system may, and indeed perhaps should, be with us for many years to come. Do we really want to go back to the practices and standards that nearly caused a repeat of the Great Depression? I think not.
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thethinker
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Re: If Treasury Yield's stay low.....then what?

Post by thethinker »

I didn't mean to turn this into a political discussion as to the market crashing or banks failing. I was simply curious what these low treasury yields mean for other investments so I can better understand how markets work.

If I might add another question:
If Treasury Yields continue to stay low, does that mean mortgage prices stay low? What would this mean for REIT investments, or possibly just the purchase of real estate investment properties?
gerrym51
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Re: If Treasury Yield's stay low.....then what?

Post by gerrym51 »

keep doing what your doing-if things change then change
dickenjb
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Re: If Treasury Yield's stay low.....then what?

Post by dickenjb »

thethinker wrote:I didn't mean to turn this into a political discussion as to the market crashing or banks failing. I was simply curious what these low treasury yields mean for other investments so I can better understand how markets work.

If I might add another question:
If Treasury Yields continue to stay low, does that mean mortgage prices stay low? What would this mean for REIT investments, or possibly just the purchase of real estate investment properties?
Mortgage rates generally follow the 10 year Treasury. So as others have already told you, if Treasury yields stay low, everything that is priced off them will stay low as well. Investment grade corporates, junk bonds, mortgages, ....
jimkinny
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Re: If Treasury Yield's stay low.....then what?

Post by jimkinny »

The Fed tried to support the economy with low rates and the QE stuff. Low rates, more likely people will borrow, more likely banks will lend, business will borrow, companies build and sell more houses and cars and more people get hired and profits increase and stocks go up etc.....

The Fed has been trying to push a wet noodle through a hole that is just a bit larger than the noodle while holding the end away from the hole.

What happens with continued low rates is a anyone's guess. It won't hurt economic growth but there are some that think we may be close to an economy that will not respond to low interests rates, maybe fewer fear this than 1-2 years ago, but still, who knows? Maybe nothing happens, maybe the economy takes off due to increasing demand and happy days are here again.

This stuff is all so nebulous that trying to figure what will happen next is pointless based on this stuff. What would have happened if Russia would have gone into Ukraine and cuts off natural gas to Europe, Europe sinks into deflation and is a further drag on the world economy and the US has low rates? Too many ifs.

It is interesting to read and think about though. Just don't buy anything based upon what any one writes.

jim
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thethinker
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Re: If Treasury Yield's stay low.....then what?

Post by thethinker »

dickenjb wrote:Mortgage rates generally follow the 10 year Treasury.
Interesting. So if the 10 year Treasury stays where it is or even dips down a bit more, then the mortgage rates will likely stay about where they are or slightly drop too. am i correctly understanding you?
dickenjb
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Re: If Treasury Yield's stay low.....then what?

Post by dickenjb »

thethinker wrote:
dickenjb wrote:Mortgage rates generally follow the 10 year Treasury.
Interesting. So if the 10 year Treasury stays where it is or even dips down a bit more, then the mortgage rates will likely stay about where they are or slightly drop too. am i correctly understanding you?
Yes, that is what I said.
dl7848
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Re: If Treasury Yield's stay low.....then what?

Post by dl7848 »

richard wrote:
Also, are rates low because the Fed is trying harder than expected to stimulate the economy or are rates low because the economy is slow and the Fed isn't trying very hard?
Here* is an example of an analysis by an economist (Stephanie Pomboy). Her take is that the Fed will probably have to pause the taper, meaning rates will go lower due to the still-slowing economy. She makes the interesting point that in the past, the prospect of more stimulus (or less tapering in this case), would give rise to animal spirits and the buying of stocks. But now that we've had several rounds of QE and the economy is still weak, the prospect of more stimulus/less taper may not have the same effect as before, and stocks may suffer in such a slow-growth scenario.

Her recommendations seem to be for gold and treasuries (yes, controversial!) and when pressed for recommendations on stocks, she advises shying away from the consumer discretionary sector (due to the slow growth) and being overweight large caps/multinationals (vs small caps) and looking globally. None of these recommendations are especially new or remarkable, and these are not recommendations for the board. But it reflects the view that certain sectors or parts of the world may do better than a broad market approach when rates are low due to slow growth.

The point here is not to agree or disagree with this economist's views. Rather to understand her point that additional Fed stimulus may not have the same effect as before. So rather than loading up on stocks if the Fed pauses the taper (not that that is the Boglehead way :D), just stick to a diversified stock-bond approach and continue with the rebalancing. But realize that there is the potential that stocks may not do as well as they have in past when the Fed has acted.

*Without a Barron's subscription, access to the article is via a Google search for the title: Stephanie Pomboy: The Fed Will Have to Reverse Course
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thethinker
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Re: If Treasury Yield's stay low.....then what?

Post by thethinker »

dl7848 wrote:
richard wrote:
Also, are rates low because the Fed is trying harder than expected to stimulate the economy or are rates low because the economy is slow and the Fed isn't trying very hard?
Here* is an example of an analysis by an economist (Stephanie Pomboy). Her take is that the Fed will probably have to pause the taper, meaning rates will go lower due to the still-slowing economy. She makes the interesting point that in the past, the prospect of more stimulus (or less tapering in this case), would give rise to animal spirits and the buying of stocks. But now that we've had several rounds of QE and the economy is still weak, the prospect of more stimulus/less taper may not have the same effect as before, and stocks may suffer in such a slow-growth scenario.

Her recommendations seem to be for gold and treasuries (yes, controversial!) and when pressed for recommendations on stocks, she advises shying away from the consumer discretionary sector (due to the slow growth) and being overweight large caps/multinationals (vs small caps) and looking globally. None of these recommendations are especially new or remarkable, and these are not recommendations for the board. But it reflects the view that certain sectors or parts of the world may do better than a broad market approach when rates are low due to slow growth.

The point here is not to agree or disagree with this economist's views. Rather to understand her point that additional Fed stimulus may not have the same effect as before. So rather than loading up on stocks if the Fed pauses the taper (not that that is the Boglehead way :D), just stick to a diversified stock-bond approach and continue with the rebalancing. But realize that there is the potential that stocks may not do as well as they have in past when the Fed has acted.

*Without a Barron's subscription, access to the article is via a Google search for the title: Stephanie Pomboy: The Fed Will Have to Reverse Course
this article sounds very interesting. is the subscription to barron mandatory to reading this article? are there any other sites carrying it or sharing it?
thank you for the point of view
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