The Bond Market Explained For CNBC

Questions – Low Yields

We occasionally turn the volume up on the TV`s just to hear what others are thinking in mainstream business media with the Sales & Name Game that is business television these days and CNBC asked the following question: “Why if everybody is talking about inflation is the bond market not moving?”

Frankly, there is so much market illiteracy even among the professionals in the financial market as witnessed by the conversation revolving around high frequency trading, even by the so-called experts who commented publicly on the issue it should be expected that many market participants fail to understand the bond market dynamics regarding why yields are so low relative to expectations at the beginning of the year.

Answers Provided

So here goes:

1. Bond yields rallied to the close of 2013, and they were at very elevated levels.
2. Equities were also at all-time highs. 
3. The first quarter was tough for two reasons weather, and an exceptionally front loaded 3^rd and 4^th quarters that left slack in the inventory and spending cycle. 
4. Lots of low interest money available from many fronts, see Japan, China, US and Europe. 
5. Makes sense given the cheap money available, yields at relative trend range highs, equities range bound, and economic data suffering because of an extremely debilitating winter and Growth Pull from Robust 3^rd & 4^thquarters, to put on massive yield chasing conservative carry trades. These were conservative given the aforementioned unique set of points coming together just right.

The High Yield Carry Trade Explained

Here is the trade borrow at rates from 10 to 25 basis points, and I mean borrow in exceptionally large terms (leverage), then depending upon the currency one borrowed in (there may be currency machinations involved in getting into the currency where wanting to invest this cheap loan, i.e., sell Yen and buy Dollars), then pick a ‘perceived’ low volatility asset that pays some form of Yield, i.e., 10-Year at 3%, Utility Stocks with High Yields, etc. buy this yielding asset and sit back and rake in the delta each day, week and month!