No Bonds!

Great sentiment data here from David Rosenberg.   I know he catches a lack of flak for his negative stance on the economy, but there’s no debating the fact that he’s been dead right about the bull run in US government bonds.  And that’s at a time when virtually no one thought he was right (well, except for maybe yours truly, Gary Shilling, Van Hoisington and a few others).  Here’s the data and commentary via DR:

“A loyal reader sent this to me yesterday – the Barron’s Big Money Poll from the Fall of 2011, when only 5% of the portfolio managers surveyed were bullish on US Treasuries and a whopping 73% were bearish.  What a great call seeing as the 10 year t-note has collapsed 45 bps over that time frame to 1.7% and in the process generated a net return of 5%.  Back then, only 18% were constructive on corporates (27% negative) and  17% on muni bonds (35% bearish).  “

The note goes on to show that the 2012 BM Poll showed 2% bullishness on US T-bonds and 81% bearish and 14% bullish on corporates and just 12% bullish on munis.  That comes out to an average of about 9% bullishness on fixed income.  And the result from this years poll?  11% bullish on fixed income, 89% bearish, and as I noted the other day, a record 86% bullish on equities.

It’s also interesting to note that 30 year US Treasuries have averaged an 8% compound growth rate over this period….Not too shabby.


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Cullen Roche

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. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Geoff

    Long Treasuries at 3% are a bargain.

  • DH

    Just 1 question: Since capital gains due to rising bond prices and falling rates caused much of the overall gain, is he implying that rates will continue to fall and prices will continue to rise, creating even more capital gains with bonds? Will long term rates fall to zero eventually? By implication, it would seem he thinks so based on your excerpt.

    The ‘bond bubble’ is real but the hype about massive explosions soon is probably false. Rates are about as low as they will go (and prices are at a high) unless some new massive scare hits the investment world or some bizarre new QE buys the rates down even further.

    Where will new gains come from with bonds? Japanese buying European debt using carry trade money?

  • Geoff

    DH, you don’t really need anything new for long rates to continue to decline. Long rates are ultimately a function of short rates. The longer the Fed maintains ZIRP, the more downward pressure it exerts on long rates. ZIRP is like gravity. So if you think ZIRP will last for several more years, long bonds should do OK. However, if you think the Fed will raise rates sooner than the mkt expects (due to unemployment dropping below 6.5% or whatever) then you might want to avoid bonds.

  • DH

    Agree only a little. Before Twist, 30 year rates were about 4.5%. ZIRP was in full effect at that time. Long term Rates will rise if and when the Fed ever stops subsidizing them. The amount of the rise is debatable. Economic theory is a failure at making a decent prediction. It is my belief that QE will keep rates depressed, but they will rise somewhat when the Fed stops buying down long term rates.

  • Geoff

    F twist and QE. It’s all about ZIRP.

  • DH

    If the Fed intends to use the Japanese model and keep ZIRP, then the US economy is functionally dead. Asset managers passing financial assets back and forth for more money on average will simulate a functional economy. If the Fed decided to kill the economy by helping it with low rates, you are correct. I’m just taking the optimistic point of view.

  • Geoff

    I feel you, DH, but the Fed is just trying increase the amount of inside money in the system. Rather unsuccessfully, I might add. The Fed can control the interest rate, but not the money supply, which is endogenius.

  • Johnny Evers

    It’s hard to see any principal gains in the bond market, even the 30-year bond. Let’s say long term rates go to 1 percent — then I guess you’d see a bump. But if the economy improves and rates rise, then you’ll lose money.
    So if you like bonds, you’re saying the economy is going to be bad for a long time?

  • SS

    If I had a knickel for every time I’ve read “there’s no upside in bonds” over the last 10 years….oh wait, I do have thousands of nickels thanks to taking the other side of this belief.

  • Alberto

    I’ve repeated this statement endlessy. The equity market is not driven up by new FED money but by irrational market expectations. Economy is weak and a recession is coming, not because this and that, but because contractions and expansions are the natural rhythm of the economy which cannot go in one direction only. So the markets will be disappointed again, the FED will not help them because it’s not the FED’s job and the stock indexes will crater everywhere. 10y is going to 1% and 30y to 2%. I’m an avid buyer. For the longer term resource depletion will constrain growth but of course not innovation and quality of life. We need to change our parameters: aggregate demand is meaningless if there is overcapacity in sectors that have nothing more to say to real wealth creation. A clean up is necessary, do not stop the market in making this, what have to go bankrupt has to go bankrupt, invest money in the future not in the past.

    Sorry for this rant.

  • Johnny Evers

    OK, so you are in the camp that believes interest rates will fall even further. That could very well continue to be the case.
    If rates keep falling, what other investments look good, in your opinion?
    Do you disagree that the risks are higher?

  • Geoff

    A bump, JE? If long rates declined to 1%, the long bond price would rise by 45%!

  • Johnny Evers

    You’re right, of course. That makes it seem impossible, doesn’t it? You’d have to find a buyer willing to get 1 pct on his money with no upside — unless rates go to zero!! What would the price be then?!

  • SS

    30 year Japanese government bonds recently traded at 1.2%. That’s a full 1.7% lower than US government 30 year bonds. They call it the “widowmaker” trade because people like you keep trying to short it because you think it can’t go lower.

  • But What Do I Know?

    A net return of 5%? Stop the presses!

    Seriously, is Rosenberg crowing about making a measly 5%? Or is that a typo? If that’s all I get for being right in the Treasury market I’ll take my chances in stocks, thanks. . .

  • Johnny Evers

    I’m not a trader — just find it interesting that bond traders are so pessimistic. If you’re buying the 30-year, you’re saying we’re going to be Japan.

  • Geoff

    SS, you and I appear to be on the same page, but there are some arguments to suggest that US Treasury yields will not decline as far as Japan’s. The most compelling to me is that US inflation is much higher than Japan, which is in deflation. In other words, US real yields are ALREADY lower than Japan’s. However, the counter-argument is that the bond markets don’t give a sh-t about inflation. They only care about central bank activity. Given that both the Fed and the BOJ are maintaining short rates at the same level (zero), maybe long rates should also be the same.

  • Boston Larry

    Correct me if I’m wrong. If my memory serves me correctly, then Rosie is on record forecasting a fall to 2.0% on the 30 yr T-Bond, and a fall to 1.3% for the 10-yr T-Note. So he would argue for continued capital gains on treasuries from continued falling interest rates. He does not argue that they will go to zero. He says that the bull market in gov bonds will eventually turn to a bear. We just aren’t there yet.

  • Boston Larry

    As an investor, I follow Rosie, among a few others. Per Rosie’s advice, I bought and have held this Vanguard long-term corporate bond fund for the past 5 years. VWESX, these are the results, which by the way beats the SPX over the past 5 years:

    past 1 year – 11.6%
    3 yrs annualized – 12.9&
    5 yrs annualized – 11.0%

    But the Vanguard S&P 500 index fund over the last 5 yrs has returned an annualized 4.8%. Rosie’s advice beat it by more than 2 to 1 !!

  • GYSC

    Rosenberg has been wrong about equities, not much at all wrong about the economy.

  • Old Dog

    At 1% on LT Treasuries and 2 – 3% deflation, they are golden.

    Until they aren’t!

    Ultimately, Treasuries at these rate are a bet against Capitalism (and therefore human nature).

    I wouldn’t take that bet.

  • Andrew P

    Of course the economy will be bad for a long time. History says that great depressions take a couple of decades and a world war to produce recovery.

  • But What Do I Know?

    I’m glad you’ve done well, don’t get me wrong, but the article was about Treasuries and whether or not to buy or own them in the Fall of 2011. My point is that things worked out pretty much as Rosenberg predicted, and he only made 5%. That seems to me to be a very small reward for being correct on a controversial position–especially when the punishment for being wrong would have been much greater.

    Being right may be important for a financial writer, but if it doesn’t translate to real money (a 5% return is not real money in my book) then what’s the point?

  • Tim

    “Long term Rates will rise if and when the Fed ever stops subsidizing them”

    If you are referring to QE as the support, you may be wrong. Cullen has shown that each time QE ended, rates tanked….

  • DH

    Rates tanked only when there was a flight to safety. As I said, I’m being optimistic and believe that some form of normal rate curve will eventually reappear when QE ends. I suspect there will be a fall in equity and commodity prices immediately after the end of QE is announced that will cause a flight to safety. After that, rates should behave more normal (you would think).

  • DH

    Did he say what will drive the bond market into this situation? Or just predict it without reasoning out a reasonable cause and effect scenario? Remember, normal cause and effect economic thinking has failed in recent years. His curse is drawing consistently faulty conclusions from excellent data collection.

  • Tom Brown

    Cullen, “I know he catches a lack of flak” … “lack” or “lot?”