Thursday, August 13, 2015

8/13/15 The deflationary trade is on, in my opinion (see disclaimer)

Bonds going down (yields going up) is the reflation trade.  Bonds going up (yields going down) is the deflation trade.

Here are the bonds with the 50 day moving average in blue.  It still looks like the blue line has bottomed and is turning up.

Countering this trade there can be supply from foreigners continuing to sell Treasuries, the FRB reducing its balance sheet, from the Treasury selling bonds to repay the loans to the other funds they are borrowing from to cover deficit spending, and deficit spending can increase.

Foreigners are likely to buy Treasuries as a safe haven in a deflationary world.  The FRB is not likely to reduce its balance sheet any time soon.  The Treasury must sell bonds to cover its loans and it seems to me deficit spending will be increasing.  I have no way to quantify the offsetting supply and demand.

 The USD declined with the Yuan devaluation because a delay of raising rates by the FRB is being priced-in.  After the dollar is priced-in the dollar could continue upward as a safe haven.  Or it might not and just wait for the FRB to raise rates.

 The dollar going up means to me deflationary expectations in the world with the dollar being a safe haven.  The world buying Treasuries is an increase in demand pushing up the price.  But in the end, I am watching the 50 day moving average.

disclaimer:  I don't know what I am talking about

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