Monday, June 17

The purchase of bonds-after the crash

The purchase of bonds-after the crash
| By Jim Jubak

It's been a scary 6 weeks for who owns bonds, and the long-term prospects for more carnage is not ideal for stocks. But the recent sell-off was extreme, so we could see a rally.

If all the recent speeches by members of the US Federal Reserve plans to cone the Central Bank program of the complete package of Treasury bonds and mortgage backed debt off, designed to test the mood of the bond market, the results were downright scary.

In the last few weeks. the Fed has discovered that when the bond market starts end of fed stimulus provide the and begins to unwind their long positions, it just a few buyers for bonds or mortgage backed securities are. And when few buyers and everyone would like to sell it, bonds fall like a stone.

We are all concerned been, that if the Fed begins to unwind its stimulus of the financial markets, it could trigger a market rout.

And the Fed-have discovered that we were quite provide.

And now the question is: what can the fed do to bond to stem a drop in prices that is definitely too far and too fast?

This is an important question for bondholders, of course, but also for investors in stocks. Some volatility bonds will move some investors in stocks. But too much volatility in bonds is just scary and sends money noise from all financial assets.

Bonds had a terrible six weeks.

Treasury bonds-note that you as a yardstick for the risk-free yield-lost 10.7% from 30 April by the close on June 7 have measured by the Bloomberg US Treasury bonds index are used.

Jim Jubak

Other debt instruments such as mortgage-backed securities, had a worse time. IShares FTSE NAREIT mortgage plus(REM) Exchange traded fund, the real estate investment trusts that mortgage-backed securities to buy tracks, decreased 12.8% from 30 April to 7 June. Annally capital management (UR), a REIT, which manages a portfolio of mortgage-backed securities, April was 15.4 per cent from 30 to 7 June.

Even the powerful have taken their lumps. Mr. bond, Pimcos Bill Gross, has one seen the funds he manages, PIMCO corporate and income opportunity (PTY) falling 13.5% from 30 April to 7 June.

The drops seem extreme, unjustified, exaggerated, hysterical. While the concern that the fed to Cone from its $85 billion in monthly purchases of Treasury bonds and mortgage backed securities already as June or July in reality starts its meetings, the Fed has done a dollar from pointed, and a schedule September or October for every move seems more likely. And even then, the Fed is not particularly quick to move.

The yield on the 10-year Treasury received only 2.17% by 1.84% a month and 1.64% a year ago.

But the drops don't seem extreme, unjustified, exaggerated and hysterical at all considering the certainty that promote the fed, impulses from the financial markets at some point end of 2013 or early 2014--pull back when the economy tanks. Send interest rates higher. And bond prices lower.

This certainty is hard to figure out why someone would buy bonds or other fixed-income securities at all. Unsightly yields are low and prices are headed lower in the long run. So why buy?

The drops, we at the market for Treasury bonds, companies that bonds and mortgage-backed securities from this perspective are exactly see what you'd expect when a market starts to unwind huge long positions, and finds that it not many buyers.

Think a

Attack it this way: an increase in the yield on 10-year Treasury at 2.5% of the current 2.17%-who not unthinkable, when the yield on the 10-year Treasury 2.17% by 1.84% in a month-gone would produce a drop in the price of a Treasury $1,000 up to $868. This is an additional 13.2% loss, on top of that the 10.7% loss, the Bloomberg-Treasury index shows in the last six weeks.

What could turn this situation around?

A Treasury buyer is currently paid 2.17% for the risk of loss of capital of this magnitude. That seems like a crazy bet.

It is a miracle that there are buyers.

In the short term, I can three things-think, and she would probably jointly submitted.

Initially, the yen could cease to rally against the dollar. If the yen fell, money in dollar-denominated assets, including Treasury bonds flowed, because the dollar as a safe haven from the decline in the yen provided. Extreme liquidity of the Treasury market-it is so great that it is easy in to move, also if you large Positionen--added to the attractiveness of the market as a safe haven.

On 7 June, the dollar stopped its fall against the yen, and today the greenback recovered, climbing 1.6% against the yen. After the drop in the value of the dollar against the yen, the currency would have enough room for manoeuvre to the yen-a

Moving from Friday 97,56 Yen to the dollar at the top of the pre rally close range near the town of 103-to buy Treasury bonds an attractive bet on a rising dollar.

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