When I tell people to get long treasuries, they look at me as if I had three dicks on my forehead. The most common response is ‘by golly, bonds are expensive, are they not?’
The short answer is yes, but not compared to other foreign sovereigns.
The reason to get long and to stay long bonds has everything to do with central bank policy. We’ve discussed the overt manipulation in European and Japanese yields. It’s on the record and main stream news. They are printing money and using it to drop yields, in both federal and corporate credits. With this backdrop, an investor in bonds literally has a guaranteed bagholder for as long as these policies persist.
Also, I think any logical person would conclude that US bonds shouldn’t be trading at a discount to Italian, Spanish and French bonds, but they are. There is a great arb play here and worth exploiting.
How does this trade implode? Here are a few scenarios.
Central Banks stop QE
Under this scenario, I suspect bonds will get hit pretty hard. The assumption is they will not stop QE for fear of causing dislocations within the EU, similar to 2011, when the PIGS diverged from German bonds. There is always a chance they will try to get off QE. However, odds are, at the first sign of economic weakness, they’ll get right back on the QE tit.
The economy roars
None of the data suggests that we’ll see a booming 3%+ economy. From almost every vantage point, the economy is likely to plod along at a steady 1-2% pace.
People sell bonds for stocks
Being that markets are near record highs already, with bonds higher by 15% year to date, I find little motive for investors to sell bonds, as part of their asset allocation models, just to grab more exposure in equities. This isn’t how the real world works. Bonds are bought by governments, large institutions and the layman who wants income, for low risk and high liquidity aspects of the investment.
Take a look at the seasonality stats for TLT and how every other year since 2010 it traded down in September.
You don’t buy bonds to make a fortune. Bonds should be bought as part of an allocation strategy and/or for safety reasons. Should the market go down, rest assured, there will be a flight to safety to bonds.
Plus anyway, the worst case scenario, in terms of drawdowns, is 5-10%. Shit, when playing with those little Chinese devil stocks 5-10% is the daily range.
In summary, everyone is overthinking the bond market and they’re not reflecting new information into their theories. This isn’t the same bond market that grandpa traded in. This is a disgusting cesspool of manipulators with endless supplies of money to help alleviate the borrowing costs for their stifling debts. Get it? Rates can’t go up because of the debt. If central banks stop QE and begin a comical campaign to hike, parts and pieces of traders will be festooned all over Wall Street, as markets dive into the abyss.
I’m just playing the probabilities, nothing more.
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What are your thoughts on SIL?
Aggressive. I prefer gld and some miners.
If,
“None of the data suggests that we’ll see a booming 3%+ economy. From almost every vantage point, the economy is likely to plod along at a steady 1-2% pace.”,
Why is candidate Trump promising 3.5% growth? What am I misunderstanding?
What the economy will do under a different regime is 100% different from the status quo. Lower taxes and less regulations will force me to be bullish.
Presidential candidates often promise growth in an economy that they have little to limited amount of control over.
Does anyone issue or accept Bearer Bonds these days?