Overnight Yields Can Give Long-Term Clues
Over the last three years I've bemoaned the market's fetish for shorting bonds. Recently our own Doug Kass referred to shorting bonds as his "largest bet," so clearly the idea isn't dead. Indeed, I think Kass' rationale is perfectly reasonable. To paraphrase, an improving economy here in the U.S. and a dissipation of the safety bid should put upward pressure on yields. I agree. But for anyone to make this a successful trade, you really need to think carefully about how a rising rate scenario will play out.
First, let me distinguish between real interest rates rising and nominal interest rates rising. Real interest rates are just the stated yield minus inflation. We could use the stated yield on a TIP as shorthand for real yields. In theory, real yields are a product of economic growth and/or investment opportunities. So, real yields tend to rise when growth is picking up. Nominal interest rates can rise either because real yields rise or inflation accelerates, or both....695 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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