ZROZ - PIMCO 25+ Year Zero Coupon U.S. Treasury

[JEast]

It is surprising that we have a near consensus (80%+) that central banks are doing the wrong thing but at the same time near consensus saying that long bonds are a train wreck ahead.  Are not those two ideas mostly incompatible from an investment perspective?  Henceforth, if the central bankers are indeed to be proven wrong then surely it would be a 'profoundly deflationary failure', would it not?  If so, maybe ZROZ is an interesting hedge for you central bank haters out there.  Or call options on the long bond if you dabble in futures.

 

 

Cheers

JEast

[constructive]

Henceforth, if the central bankers are indeed to be proven wrong then surely it would be a 'profoundly deflationary failure', would it not?

 

Surely other types of failures are possible too?

 

"Happy families are all alike; every unhappy family is unhappy in its own way."

 

 

[Guest wellmont]

It is surprising that we have a near consensus (80%+) that central banks are doing the wrong thing but at the same time near consensus saying that long bonds are a train wreck ahead.  Are not those two ideas mostly incompatible from an investment perspective?  Henceforth, if the central bankers are indeed to be proven wrong then surely it would be a 'profoundly deflationary failure', would it not?  If so, maybe ZROZ is an interesting hedge for you central bank haters out there.  Or call options on the long bond if you dabble in futures.

 

 

Cheers

JEast

 

why could it not be an inflationary failure?

[JEast]

Why could it not be an inflationary failure?  I simply ask where would the inflation come from.  Inflation is nearly guaranteed not to be coming from labor given the healthcare train wreck and possible immigration reform. Both of those two items will dampen your wet dream if you are thinking about getting a pay raise higher than 2%, on average.  Is inflation coming form commodities, short supplies?  Does not look like it.

 

If one is scared of a slightly overvalued market, or worried of a possible major default of a country, or that central bankers are mistaken in there policy, then long bonds look like the right investment 2-3 years out.  If markets fall, bonds go up, a major default bonds go up, get another recession because of spiking inflation, bonds go up.

 

I am in the Hossington, H&W, Shilling camp on this one.  Of course that is a minority view but that is the sandbox that I play in :)

[obtuse_investor]

I am in the same deflationary camp primarily because I suspect the large credit boom from the early 80s will be followed by a bust.

 

However, we run a risk of thinking in a binary fashion.

 

A short deflationary shock could be followed by a large inflation problem.

 

Now that the central banks of the world have opened the door to "unconventional policies", I wouldn't be too surprised to see money directly being dropped on the populace to stifle deflation. Deflation is a necessary evil that will cleanse the system of the credit induced toxins. However, our governments have a strong bias towards some action. And I suspect, at least somewhere in this world (likely Japan) we will get to see one evil quickly being replaced by another, inflation.

 

The end result is similar-- a reduction in debt. The difference is that, with deflation the pain is endured by the borrower; with inflation the pain is endured by the lender.

 

In the end we will probably see a bit of both. Although, politically speaking, the borrowers have the upper hand.

 

To cycle back to ZROZ; it's an interesting idea, but too hard to time for someone like me.

 

 

[Sunrider]

Why could it not be an inflationary failure?  I simply ask where would the inflation come from.  Inflation is nearly guaranteed not to be coming from labor given the healthcare train wreck and possible immigration reform. Both of those two items will dampen your wet dream if you are thinking about getting a pay raise higher than 2%, on average.  Is inflation coming form commodities, short supplies?  Does not look like it.

 

If one is scared of a slightly overvalued market, or worried of a possible major default of a country, or that central bankers are mistaken in there policy, then long bonds look like the right investment 2-3 years out.  If markets fall, bonds go up, a major default bonds go up, get another recession because of spiking inflation, bonds go up.

 

I am in the Hossington, H&W, Shilling camp on this one.  Of course that is a minority view but that is the sandbox that I play in :)

 

Hmmm... what about the fact that bonds are a fixed claim losing value in that inflation scenario?

[Guest wellmont]

Why could it not be an inflationary failure?  I simply ask where would the inflation come from.  Inflation is nearly guaranteed not to be coming from labor given the healthcare train wreck and possible immigration reform. Both of those two items will dampen your wet dream if you are thinking about getting a pay raise higher than 2%, on average.  Is inflation coming form commodities, short supplies?  Does not look like it.

 

If one is scared of a slightly overvalued market, or worried of a possible major default of a country, or that central bankers are mistaken in there policy, then long bonds look like the right investment 2-3 years out.  If markets fall, bonds go up, a major default bonds go up, get another recession because of spiking inflation, bonds go up.

 

I am in the Hossington, H&W, Shilling camp on this one.  Of course that is a minority view but that is the sandbox that I play in :)

 

Hmmm... what about the fact that bonds are a fixed claim losing value in that inflation scenario?

 

inflation is never coming back. ;)

[jay21]

Why could it not be an inflationary failure?  I simply ask where would the inflation come from.  Inflation is nearly guaranteed not to be coming from labor given the healthcare train wreck and possible immigration reform. Both of those two items will dampen your wet dream if you are thinking about getting a pay raise higher than 2%, on average.  Is inflation coming form commodities, short supplies?  Does not look like it.

 

 

There's quite a few "green shoots" that can lead to an inflationary environment.  House prices, construction hiring, energy boom, etc.

 

If one is scared of a slightly overvalued market, or worried of a possible major default of a country, or that central bankers are mistaken in there policy, then long bonds look like the right investment 2-3 years out.  If markets fall, bonds go up, a major default bonds go up, get another recession because of spiking inflation, bonds go up.

 

I am in the Hossington, H&W, Shilling camp on this one.  Of course that is a minority view but that is the sandbox that I play in :)

 

You're discussing 25 year bonds but your investment horizon is 2 to 3 years?  Also, wouldn't spiking inflation be bearish for bonds? 

[JEast]

There are a plethora of ways you can paint this idea so feel free to paint me as a macro tourist on this thread.  With my paint brush, I see that bond yields normally go up for two primary reasons, 1) possible default, or 2) inflation expectations.  I do not see a default, and inflation just does not appear to be in the cards as 50%+ of the inflation generator usually comes from labor costs.  Over my lifetime, I have only seen marginal inflation and most everything I buy is relatively cheaper today than it has ever been.  Yes, you could buy a good car for $10k fifteen-twenty years ago that now costs $30k but they are not even comparable for what you get with gas milage, safety, conveniences, etc…  Thank computers here.

 

Given this painting I just painted and with yields at 3.70% on the 30-year, if I am wrong the yield goes to maybe 4.5%?  If unseen scenarios play out, then the yield goes back to 2.5% to retest the lows again.  Not the normal risk/reward I would like, but willing to put a little capital into the idea until something really interesting pops up.  Maybe gold drops below $1,000 and the surviving miners will look better, or NG goes back below $2mcf and some of the drillers look better, or a big hurricane strikes and some of the P/C guys look interesting.  Today, the zero coupon looks o.k., tomorrow??

[Guest wellmont]

well so far this trade, when it was first proposed, is already a loser. :) but that's short term. In USA if you go ask 50 random people whether they think prices are higher than they used to be, I would say it would be unanimous. prices are higher. You can make the argument, as Greenspan and Bernake do, with the use of Hedonics, that prices are tame. but that's ivory tower stuff. In the real world, people that shop--for food, clothing, transportation, shelter, education, and health care, know that prices have been going up. I never hear anyone randomly say, "wow things are sooo much cheaper now!". However, I regularly hear people complaining about how expensive everything is getting, especially relative to their paltry income growth.