CHART OF THE DAY: BONDS LOOK LIKE A GOOD BET
11 February 2010 by Cullen Roche
6 Comments
According to data compiled by Bloomberg, bonds haven’t declined in consecutive years since the 1950′s. On the back of last year’s 11% decline and the continuing low inflation environment bonds just might have history on their side:
“Last year’s return, based on the note’s price change and interest payments, was negative 11 percent. This was the worst performance ever recorded by the St. Louis Fed, whose data goes back to 1928.
The previous mark was set in 1999, when the 10-year security posted a negative 8.3 percent return. In the following year, the note returned 17 percent. Similarly, the total return swung from negative 8 percent in 1994 to 23 percent in 1995.”
Source: Bloomberg
Who really gives a damn about back to back years in bonds? When in history before have rates been so low for so long? This is unprecedented and rates have nowhere to go but up. Rates go up, bonds go down.
It’s actually not unprecedented. It has been going on in Japan for 20 years due to the continuing deflation. I think what treasurues are telling us is that inflation fears last year were far too high and the price performance proves this. With continuing low inflation there is little reason to believe that this trend will continue. The inflationists have it wrong in other words and markets will reflect this in the price of bonds….
Well, the TLT chart is telling me that it’s about to test its recent low at 88.50. I have a position in the low 90s. It if breaks down below, I’ll wait, but if it bounces strong (could coincide with a test of the 1150 top on the S&P), then I’m in big for a big run.
ahem….http://ftalphaville.ft.com/blog/2010/02/11/147641/bond-on-bonds-disaster-ahead/
Deflation.
What people forget is that if 30 years ago, just when the bull market in Equities was about to kick off, you instead invested in 30year Treasurys and rolled into the zero coupon format in the late 80s when they arrived (so you didnt have to worry about re-investing the coupons as yields fell)…You would be better off today than having been invested in the SPX at 150 by a significant margin
What does this tell you? The last 30years has been about falling interest rates coupled with increasing leverage as borrowing became more “affordable”. There was little magic to the stock marklet beyond that.
Yes, back then rates were 14%, so 4.75% in the Long Bond today looks a bit boring now…but I would guess 30 years from now its not improbable the stock market has gone nowhere, while buying a 30yr Treasury strip will have almost 5x your money..guaranteed
We can worry about hyperinflation all we want, but deflation / delveraging etc is much more probable
And there is no more proof that bonds do better in such an environment than Japan. Locking in 7% bond yields 20 years ago = 3.9x your money today versus buying the Nikkei in 1990 after it had already corrected 40% = – 60% today
As such, buying bonds made you are almost 10 times better off, than buying into The early 90s bear market rally in the Nikkei