US Treasury Nominal Yields Could Go Negative In Massive Flight To Quality; Kyle Bass On JGBs, USTs And Gold

2-year U.S. Treasury Yield (
I actually think there's a possibility that U.S. Treasury nominal yields could go negative in a massive flight to quality trade, similar to when yields on 2-year German government bonds, 2-year Finnish government bonds and 1-year Danish government bonds went negative at the height of the eurozone sovereign debt crisis in July 2012. If the U.S. economy enters into a recession, the eurozone crisis flares up again, S&P earnings roll over, deflationary forces take hold, and the Federal Reserve keeps up QE (or there's a negative geopolitical event), I don't see why money wouldn't move from risky assets (stocks) into Treasuries. I believe this even more so because Kyle Bass, founder of Hayman Capital Management, believes money fleeing Japanese Government Bonds could rush into U.S Treasuries in a flight to quality (watch Kyle Bass's recent speech at the University of Chicago on "The Upcoming Crisis in Japan").

1-year U.S. Treasury Yield (
He thinks Japan's aging populationtrade deficit, budget deficit, massive debt/gdp ratio, its debt interest/tax revenue trend (1, 2), and Japanese pension funds starting to sell/diversify out of JGBs domestically (1, 2, 3, 4, 5, 6, 7) will cause a serious JGB crisis down the road (hard to time though). He doesn't think the Bank of Japan will be able to print Japan's way to prosperity (devalue the Japanese yen to fuel an export boom). He continues to believe that Japan is at its "Keynesian endpoint," and the Bank of Japan will "lose control of rates" and continue to weaken the yen. The endgame would be if the BoJ is forced to monetize Japan's debt just to fund debt interest payments (government issues debt to the BoJ's printing press to service the debt).

But Bass said he'd rather own gold over U.S. Treasuries (paper) in the end. He was interviewed on Bloomberg TV on April 9, 2013. Watch the full interview below (the Bloomberg video player might appear below the blog's template with a duplicate video... I'm looking into the issue).

Here's what Kyle Bass said at 9:12:

"If something happens in Japan like we think it is going to happen, I think U.S. Treasury nominal yields will go negative in a flight to quality. Maybe gold moves up and Treasuries actually get much stronger for all the wrong reasons, not as an endorsement of U.S. fiscal policy because it is the only place money has to go. If monetary policy is the only game in town, we are all in for a world of trouble. That is the way we see it."

Source: Bass Sees `Beginning of the End' for Japanese Bonds (
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