Bull Vs. Bear on US Government Bonds
Here’s an interesting bull/bear face off on US government bonds. In one corner we have permabull (on equities) Ken Heebner who recently made headlines when he stepped outside of his micro focus and into the macro arena to invest 21% of his CGM Focus Fund in a short position against US Treasury bonds. According to Bloomberg:
Money manager Kenneth Heebner, convinced that a growing U.S. economy will eventually prompt the Federal Reserve to boost interest rates, has bet 21 percent of his CGM Focus Fund (CGMFX) on a decline in U.S. Treasuries.
…
“We established a significant short position in U.S. Treasury bonds in anticipation of what we believe will be a stronger U.S. economy going forward,” Heebner said in a Jan. 2 letter included in the filing.
In the other corner is Jeff Gundlach of DoubleLine who has recently turned increasingly bullish on US government bonds. Gundlach is less confident in economic growth than Heebner is. Via Reuters:
“I bought more long-term Treasuries in the last month than I’ve bought in four years. I am a fan of Treasuries now. I wasn’t a fan of Treasuries in July,” said Gundlach, chief investment officer and chief executive officer of DoubleLine Capital.
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“They looked cheap at a yield above 2 percent, compared to certain riskier assets, which had gone up in price over the last six months while Treasury prices fell,” he said. “Also, owning 10-year Treasuries at yields above 2 percent provides an offset to credit risk we are taking elsewhere in the portfolio.”
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The investor, who was dubbed by Barron’s as the new “King of Bonds” two years ago, said he thinks the recent rally in stocks, which last week drove the Dow Jones industrial average within 75 points of its record close of 14,164.53, has gone too far.”
So we have a bond manager against an equity manager who is shorting bonds based on what is actually a form of a bullish equity bet. Who do you think is right?
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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24 Comments
Both could be right. The Gundlach quote says he is bullish 10-yr UST’s. The Heebner quote doesn’t specify what maturity(ies) he is short.
So if Heebner is bearish 30-yr UST’s, and the 30Y-10Y spread were to widen (30Y prices fall while 10Y prices rise or remain unchanged), both guys could be right.
Gundlach is expecting 10 Yrs to fall to 1.00%; similar to Japan.
Ken Heebner’s focus fund is a volatile mess causing the fund to be ranked dead last within it’s category on an annualized return basis, standard deviation, sharpe ratio, excess return, tracking error, alpha (which is -14.42% on a rolling 3yr basis and -11.4% on a rolling 5 year basis), and downside capture ratio. If this guys 10 year track record is indicative of anything it would be stay away at all costs….
My money is on Gundlach considering the Fed has told the market time and time again when it plans to change it’s policy.
The American version of Dennis Gartman.
Heebner might win this bet for the next month or two, but over the next 6 to 12 months I bet Gundlach will be right. Gundlach predicted the 2013 year-end rate on 10yr T-note will be 1.63%.
See: http://blogs.marketwatch.com/thetell/2013/03/05/gundlach-to-discuss-markets-investment-strategy-in-webcast-on-tuesday/
The tape says buy stocks. Now. Macro? That’s later. The Bernanke put is alive and well, bond yields stuck in the mud. Be careful with those market calls, early is wrong and late is stupid.
Bernanke: “expectation hypothesis — the theory that long-term interest rates equal the average of expected short-term interest rates over the same period plus a term premium”
Long-term interest rates actually represent the 24 month moving average of the prior movement in MVt (the proxy for inflation). As such longer dated securities could still fall [until Aug].
The only way stocks will fall is if the roc in the proxy for real-output falls (MVt). But the roc in MVt will only decelerate gradually (& not at all if the Fed continues with its open market operations of the buying type). This has been the case for the last 100 years. Economics is a science. Economic prognostications within a year are infallible. There is a Gospel – a “Holy Grail”.
Your a motherfucker & now your a target.
delete all my posts motherfucker
flow, you need to chill out. Your posts get caught in the spam because your email is funny or your styling is setting it off. Could also be weird links or too many links (that’s my guess). I don’t know why it happens, but it does. The spam filter is funny. Don’t worry. I clear all of your comments if they get caught. Even these ones….Geez.
What the hell is wrong with you? Cullen is one of the most reasonable guys on Wall Street. And you’re attacking him because you leave harrassing and demeaning comments all the time? Get lost you idiot.
bath salts.
“bath salts”
Now I’m going to picture Flow5 chasing Cullen around Miami zombie-style (like this guy, who’s lucky he didn’t get shot).
http://www.youtube.com/watch?v=4awVqRr1eCo
Yeah, really! … not a wise move in a “stand you ground state” especially.
… well, the way that thing concludes, we don’t really know what happens to him actually
beowulf, maybe you can help me out here… have I had the wrong impression about how Treas bonds are “retired” this whole time?:
http://pragcap.com/ask-cullen-2/comment-page-2#comment-139651
Tom, That there was knee slappin funny
HH sector? What’s that mean?
Your buddies at business insider are making me very nervous to be long. When the bulls begin to mock bears you know its a latter inning situation
http://www.businessinsider.com/dow-jones-idiot-maker-rally-2013-3?op=1
Household?
“attacking”
Going off lithium after 40 years makes you irritible. And letting Bankrupt you Bernanke get away with unconscionable acts is unthinkable.
There are a lot of very bright economists on the Fed’s research staff. But Bernanke is afraid:
“The Federal Reserve Plans To Identify “Key Bloggers” And Monitor Billions Of Conversations About The Fed On Facebook, Twitter, Forums And Blogs”
This was meant to censor his staff. It’s not a PR strategy.
flow5, where did you read this at?
Of course Bernanke is afraid. Why else would he be doing maximum QE?
1st column = 10 month roc in MVt (proxy for real-output)
2nd column = 24 month roc in MVt (proxy for inflation)
2013-01 117329 0.17 0.59
2013-02 117556 0.17 0.62
2013-03 117556 0.21 0.55
2013-04 117556 0.17 0.53
2013-05 117556 0.13 0.54
2013-06 117556 0.10 0.51
2013-07 117556 0.10 0.43 Buy
2013-08 117556 0.07 0.28
2013-09 117556 0.06 0.27
Traders should side-step bonds until July.
If you trade futures:
http://www.cmegroup.com/trading/interest-rates/us-treasury/30-year-us-treasury-bond.html
then the seasonal inflection points should be of interest. Turns reflect the FRBNY “trading desk’s” seasonal accommodation of required reserves.
RRs (bi-weekly maintenance periods), are based on transactions based accounts (bi-weekly computation periods), 30 days prior since July 1998. As RRs are “smoothed” by the Manager of the Open Market Account every two weeks (as reflected on “Factors Affecting Reserve Balances of Depository Institutions” – Fed’s H.4.1 release), these levels end up rotating (from high to low) each reporting period.
Rotations simply reflect how banks behave when complying with REG D. E.g., the end of each maintenance period (* bank squaring day) is especially revealing. Checking to see whether the banks have to pay higher rates towards the end of the period (effective federal funds rate) for their reserve balances can signal tighter & easier money market condition’s ahead.
There’s a lot of information in these numbers. On a non-seasonally (non-maladjusted) basis, #’s peak in Jan, bottom in March, peak in May, bottom in June, peak in July, bottom in Oct, etc.
These numbers determine seasonal fluctuations in stocks, bonds, commodities, etc. Seasonal patterns differ a little bit every year just because of the rotation in computation & maintenance periods & dates.
Seasonal patterns should be matched with non-seasonal patterns (roc’s in MVt where legal reserves are a proxy).
On one hand, analysts are bullish because the employment number, housing, consumer debts and among other things are going up. Even Gary Shillings seems to be more bullish than the usual. On the other hands, Gundlach is buying more long dated treasury without telling people why except that SP&500 is overextended.
Let me touch on couple points to see if my reasons to be cautious are similar to that of Gundlach. First, there is a cut of 85 billion dollars on the table. If this cut takes place or even just half of it takes place, this can translate into at least a half of a percent loss of GDP. Given the fourth quarter GDP where it’s at, it is likely we will see a negative GDP soon (within the 2 or 3 quarter). Second, by the beginning of Q4, American will have to start buying healthcare insurance (thanks to the Obamacare). One can argue that this is a force spending and it is likely to raise GDP number. The negative effect however is that many family will have to pay for health insurance if their employers don’t. This amount might be as high as 25% of their gross income and higher for some others. This will hinder consumer spending or it will have a slightly negative effect on consumer spending. In my opinion, these are things that keeps Mr. Bernanke up at night and they are one of the reasons why Mr. Chairman does not want to curve his QEs initiative.
What does this mean for the market? It is likely that the market might run up into April-June until people start ringing the bell once we have a negative print on GDP. Then the market might resumes its climb and perhaps reaches new high if GDP is still good by November.