Jim Grant made interesting observations about Treasury bond cycles, current comfort levels and leverage.
"So some say that Treasuries are intrinsically safe, inherently safe. I'm here to tell you that in 1981 at the bottom of a 35 year bond bear market nobody was calling 15% Treasuries super safe. They were calling them many names, the mildest of which was certificates of confiscation".
"I think there's one other thing to think about with respect to debt and that is leverage in the Treasury market itself". "Treasuries generated negative returns in 3 of the past 32 years. People are so comfortable with this asset class. The State of Wisconsin investment board is undertaking a program in leveraged Treasuries and that is the marginal buyer".
David Rosenberg compared the similarities between Japan in 1998 to the US today and talked about the US household balance sheet.
"Didn't Japan do the same? Doesn't the chart on short term rates and the BOJ balance sheet look like what the Fed just did? And of course on a post global credit collapse money velocity goes down, the money multiplier goes down, the cash sits on balance sheets".. "By 1998 they were at 10% of GDP, that's where we are at today. Since when did we have a bear market in JGBs they are at 1.3%. They even got downgraded in 1997, JGB yields still fell 70 basis points to the lows".
"Only 6% of the largest balance sheet in the world, which is the household sector balance sheet, is in fixed income and on top of that you have another $8 trillion or so sitting in cash. If you're asking who is buying the bonds go to the Fed Flow of Funds, take a look at what's happening in the household balance sheet and you'll find that households are buying bonds".
Interesting debate. So which is the correct contrarian play? Do you fade the chart of the 29 year bull market in Treasuries (and currently household buyers) or do you fade the giddiness on Wall Street to short Treasuries? Or none of the above and wait for a confirmed secular breakout. Foreign debt holders and US households will contribute to the catalyst when it comes. The 30 year $TYX chart does look very interesting here on a technical basis.