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

 This article was first published by me at Talkmarkets:


Before I show why they have been wrong, I am going to cite some celebrated economic pundits who said that the long bonds would go up in yield after QE. After all, they thought they had it right.

And you will be surprised to know that some of them may have wanted you to panic and sell your long bonds. In some cases, it is likely that their financial buddies in high places needed those bonds, desperately. I am not accusing any of the article builders below specifically.

But talk about a bond bubble circulated in media with a lot of force, like ideas do when they are paid for. One wonders if China was listening to the talk before unloading treasuries? That is pure speculation on my part. Or perhaps China was testing the liquidity of the bond market, which worked out just fine.

But it turns out, the little blip of rising long bonds went away. The 10 year is barely above 2 percent and the thirty year is still under 3 percent. And central banks everywhere have backtracked.

So, before I show why the pundits were wrong, here are some of their statements:

1.The Guardian said of course the interest rates for treasury bonds will rise.

2. Harry Dent wrote an article entitled The Beginning of the End: Rising Long Term Rates.

3. USA Today said that there were reasons that the long bond was on the rise. But that didn't last.

Admittedly, one fellow cited by USA Today said that any rise in yields would be cyclical, and rates would stay low for a long time.

4. Bloomberg talked about taper tantrums where interest rate yields accelerate.

5. The Street spoke of reverse taper tantrums where interest rate yields go back down.

6. OMG, FT spoke of a triple taper tantrum. 

FT was convinced of big growth on the way. Certainly, without significantly higher yields on the long bonds, the middle class won't get as many loans for houses, unless we are in bubble territory, and so the big growth would only be limited to the elite.

But that is what happens when you have massive demand for long bonds, even after QE. That is the secret of letting QE end, that bond demand for collateral in derivatives markets is massive. Even if growth was stronger than green shoots, it still would not force long yields up.

Historically, growth would mean people would leave bonds for stocks as prosperity blossomed. But, historically, there did not exist a 700 trillion dollar, give or take a few trillion, derivatives market creating artificial demand for government bonds 24/7!

8. PBS spoke of Krugman versus Rogoff and Reinhart and Stockman, the three boys who cry "wolf" continually by saying interest rates will skyrocket up soon. Krugman is not giving away the semi-secret of derivatives demand, but he is amused and commented that those other guys act like the Japanese, who have been warning and crying wolf for 20 years! 

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.


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.


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.

This is what happens when you repeal laws like Glass-Steagall. The senate vote was 90 to 8. Yes, it was a bipartisan endorsement of economic oppression and permanent austerity for the average Joe. The globalists are winning as their master plan for bonds has been realized.

Look at the Eurozone, for an example. The powerful nations threaten weaker nations in the block with suspension of banking services if they reject austerity on the citizens. If they are submissive, the powerful nations instruct their investors to buy the bonds of the weaker hands. In the words of Cloris Leachman in High Anxiety: Disturbing!

And, no wonder banks don't want to lend to the average Joe in the housing market. Why take the risk with long rates so low when you don't have to! Austerity becomes written into the stone of economic reality. Oh, I know, banks have loosened up a little, but only because house prices are bubblicious again.

So, while it was not literally "everyone" who said yield on treasury bonds would go up after QE, the ones that did are a vast majority of pundits. There are some big hitters who have warned of that rising tide, and the main stream media embraced it. The public pretty much believes that. But it isn't happening. It can't happen, in my opinion.

Even if interest rates are raised at the short end, the Fed cannot control yields at the long end. Some, like Paul Craig Roberts have said that long bond prices are manipulated, and Roberts has shown other markets are manipulated openly, like the stock market.

But, in his analysis of bonds, there is no mention that I can find of the massive demand for the bonds that now exists. I would feel more comfortable in his analysis if Roberts took into account rising demand for the long bonds. Roberts is libertarian-like in some of his analysis although he was not for deregulation in the first place.

Certainly, libertarians I talk to cannot grasp the new demand for bonds which has changed everything. It doesn't fit their belief system. They are locked into the past, like dinosaurs of economic thought. 


The implications of low rates on the world economy are worth looking into. Here are some articles I wrote that may be useful in a further study:

The Markets Are Shocked, and That Means Economies Are in Jeopardy

The Fed Scares Everyone About Treasuries from Time to Time. Is It a Scam?

Summers and Roubini Talk Negative Interest Rates, Sound Logic but Uncharted Waters

Fed Chicken and Egg Conundrum, Dimon Proves Will Rogers Right, Banks Are Broke

Are Bernanke and Yellen Charlatans Dangling the Carrot of Prosperty?

As a footnote in closing, I would say that the system we are suffering with today could implode. There could be a revolution. There could be nuclear war. There could be sane men who see the damage of derivatives, who could take the long bond out of consideration as collateral. There could be a plague. There could be a culling of the population by futuristic thinkers gaining the upper hand, although I don't think the plans will succeed. Heck, maybe God could put an end to the creation! So, things could change.

While I don't know about God's immediate plans or first strike nuclear war scheming, it is not likely that purely economic factors will change this economic system for a very long time. Gold prices, for example, may stay in the doldrums longer than gold bugs' life spans, in this treasuries-as-the-new-gold twilight zone we are now in. Talk about an ill timed investment strategy! Peter Schiff and the libertarian bugs could all be history before gold makes a big move up.

One would think that with gold used as collateral we would see the driving up of the price, but it has been acting more like a commodity than collateral. Copper is used as collateral in China but there is so much of it that it does not act like collateral in demand, like treasuries act.

Is the gold market manipulated? Some say it is. Recently, gold has begun to be accepted in clearinghouses as collateral. It isn't money, any more than sovereign bonds are money (the bonds back fiat money), but it is collateral. The demand for gold as collateral may cause gold to go up in price, but the gold market is so large other factors could impact any move up.

We know that Japan has the lead in this JapanRUs race that all nations appear to be copying. So, perhaps we could gain a clue as to when or if this financial system implodes by watching Japan. It hasn't imploded yet. And it has been zombified for 20 years and appears to be coping as the Japanese Rogoffs and Stockmans cry silly warnings about government interest rates rising at the long end. 




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