The 5–Year Bond Is Emblematic Of Careless Risk Taking In Bond Markets

Dovishness Begets Excessive Risk Taking by Speculators

The Fed minutes came out this past week and they mentioned the strong dollar and less than stellar growth out of Europe, basically more over the top dovishness which just encouraged more unwise risk taking in the bond markets. This week Dallas Fed’s Fisher said that they have identified areas of risk in markets, and James Bullard has said on several occasions that the markets are even behind the most dovish participants at the Federal Reserve regarding the forecasts for rate hikes, and the actual market actions of participants.  

Market participants may say that the Fed will raise rates mid-year in 2015, but they are speculating in bonds far out of touch with this reality. In other words, bond speculators just like any other speculators will push price as far as they can up until the last possible moment until they literally are forced out of the market by real fear of rate hikes, and the more dovish comments out of the Fed just reinforces this risky speculation.

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The 5-Year Bond Yield is Under the Forecasted Fed Funds Rate for 2015 by the Fed

For example take the US 5-Year Bond trading with a Yield of 1.53%, remember this is for a 5 year time period, and if the Fed starts raising rates by June of 2015, roughly 8 months from today, the Fed has 10 members forecasting a Fed Funds Rate above 1% by the end of 2015, with 4 members between 1.75% and 2%. There is no way in hell the 5-Year Bond trading with a Yield under what the Fed Funds Rate could be in 2015 by their own Fed Forecasts, (with a highly dovish Fed slant by the way) there is no way this is a safe investment strategy. There is no way in hell this bond is any good this time next year with the current price and yield.

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