What a Difference 30 Years Makes

Today's 30-year Bond auction went off without a hitch, surprising many bond market observers who witnessed a near-catastrophe earlier this week with 10 year note yields rising at the fastest pace since 2003. The 30-year has had a rough time lately, as the increasing time preference of Asian & Middle Eastern sovereign investors has driven down demand. Far from today's bond auction serving as a "positive sign," I think there are more complicated issues at play than an rise in confidence in the U.S. Government's future ability to repay its debt obligations. It seems to me that Asian & Middle Eastern sovereign investors are working out a Prisoner's Dilemma "with fear and trembling."
 
30 years is a long time from now, and the likelihood that U.S. taxpayers and voters will tolerate significant inflation and government irresponsibility over the long-long-term is rather low. As foreign investors begin to price in the dynamic political prospects in the United States, I think it is possible that we will see an upside down V- or U-shaped yield curve emerge, where yields on the 10-year are higher than short term notes and bills but also higher than the 30-year bond. The real inflation (and default) danger for the United States is not 30 years from now, but 10 years from now. If I were a bond investor (which I am not), I would be better on a significant recovery for the U.S. in the long-term, with serious troubles in the medium-term. The question of course is, can the U.S. survive the medium-term and make it to the long-term, or will the 30-year bonds be priced in massively inflated dollars from the sticky period in the medium-term?

These questions require a decidedly political answer. What happens to the rest of the years of the Obama administration? Who will control Congress after the 2010 mid-terms? These questions have a more direct bearing on the political risk of the 10-year note than the 30-year bond.
 
And that is why I am not investing in bonds. Too many non-economic factors influencing the future. If there's one thing I don't want to bet on, it's whims of politicians and voters.

Posted via email from skinnerlayne's posterous