Rates

Why should rates rise?

- because they seem really low, don't they?


Why should rates stay low?

- bonds remain in a secular bull market

- there's no evidence of any catalysts that would prompt higher rates (the theory that there will be a flight away from bonds due to fears about the Fed running its printing press remains in the same category as the theory early in the year that huge budget deficits would cause rates to sky-rocket)

- though nominal rates are low relative to historic norms, real rates are very much consistent with historic averages (and, if anything, long Treasuries look cheap)

- the swamp of new Treasury issuance was early this year, and the market digested that, and now there will be less prospective new issuance of longer-dated Treasuries;

- plus there's a new buyer, the Fed, which, if it intends to expand its balance sheet by $1 trillion, could digest virtually all new supply

- as long as the Chinese and OPEC need to recycle the dollars they get from their bilateral trade surpluses with the U.S., there will be foreign buyers of bonds

- easy monetary policy is here to stay as long as unemployment remains high and inflation remains low

- unemployment will remain high and inflation will remain low as long as economic growth remains below potential growth (and even for a not insignificant period of time after growth exceeds potential, as it will take a long time for the output gap to close)

- other asset markets are much riskier than bond markets, so, despite all the talk of a bond bubble, bonds as an asset class, with a guaranteed rate of return if held to maturity, will remain in demand, particularly with LDI, etc.

- the fixed income portion of household balance sheets remains low, and aging boomers will continue to need income-producing assets and more stable portfolios

- the banks have been big buyers of bonds, and as long as they're reluctant to increase their lending to households, they'll continue to be motivated to make money off the yield curve




what have I missed (for either argument)?