In a discussion about whether Treasuries risk is being underpriced, the Washington Post’s Ezra Klein talks to budget hawk David Stockman:
…Stockman, for instance, is even blunter. “It’s a hothouse, an artificially rigged market,” he says. And once the Fed exits, “there’s nothing to keep it from collapsing.” Stockman worries that people are underestimating the capacity of investors to wake up to the mispricing and exploit it. “It shouldn’t be underestimated that once the smart investors figured out that the subprime and housing mortgage market was busted, they went after it hammer and tong brought about a dramatic change in pricing in 12 months. If they start that on Treasurys, you’ll have a different world a year from now.”
This is a fair point. Obviously Bill Gross feels the same way.
But what we don’t get is why when this opinion is stated, nobody challenges the likes of Stockman by pointing out the below chart, from Jeff Gundlach.
Over the last two years, bonds have rallied during periods of QE, and fallen in between periods of QE. This is exactly the opposite of what Stockman is saying.
Now it’s possible, something has totally changed, and the relationship will be different. Fine. You can argue that, but it’s amazing that Stockman’s view goes unchallenged in the face of blatant evidence.
So next time someone does one of these articles on interest rates shooting the moon once QE ends, at least acknowledge the existence of strong contra-evidence.
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