Here’s an outside the box thought.  When we think about the proverbial “wall of worry” we generally think of equities and their tendency to rally in the face of fear.  But in his latest note Richard Bernstein says the wall of worry might just apply to US Treasuries.  Given the persistent calls for a “bond bubble”, the idea that yields can only go one way (lower), and the general belief that the USA is going to suffer a Greek like debt crisis, it makes a great deal of sense that the real wall of worry is in the US bond market.

Here’s more via Richard Bernstein Advisors:

“Investors’ refusal to embrace treasuries remains very curious.  History shows well that diversifying asset classes tend to outperform. That has been happening with respect to treasuries for quite some time, yet investors refuse to embrace treasuries. Fears regarding federal finances, inflation, and the willingness of foreigners to continue to own treasuries have generally scared investors away from treasuries.

The proverbial “wall of worry” continues in the treasury market. When will investors realize that it’s not the 1990s, and that high-fee, alternative assets continue to offer inferior diversification opportunities relative to good old-fashioned stock/bond/cash asset allocation?”


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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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  • Larry

    The long-term bull market in intermediate and long-term US treasuries is intact. Calls for its demise have been on magazine covers for years, yet it continues. The asset class that is most hated by the public has been one of the best-performing asset classes over the past 11 years, but the public refuses to join in. Only foreigners, pension funds and insurance companies and very few individual investors are benefiting from this long-term trend.

  • Leverage

    Bond bubble is absurd call, but grinding higher it starts to be pointless given negative real rates.

    So, buy any dip in the bond market, because the bond bears are mostly wrong until inflation (if) really picks up. But don’t expect huge rallies when steeping into negative real rates territory. If that’s the case buying dollars against other currencies may be a more profitable trade, with more potential (an appreciation of the dollar against the AUD ie. or the EUR of >10%, could be even up to 30%; but the UST rallying from here 30% is like people burning money!).

  • Leverage

    You can always play the old curve flattener trade, specially after important FED interventions before effects ware off.

  • Octavio Richetta

    I agred. As I posted recently, my 2012 key bet is very low duration risk-spiked US bonds. Bet on long treasuries feels scary but buying Thr dips should work.

  • Andrew P

    That is because the public does not trade bonds or use leverage. The public holds bonds to maturity, and is disgusted by the near zero yields on Treasuries.

  • B Ferro

    10 year UST price registering an ALL-TIME HIGH TODAY!

    Trying to break-out of the top end of a 25 year channel that has sent prices lower and yields higher over and over through history…

    What’s that mean if we break above? What signals are we getting about global growth prospects??

    Guess that bond bubble is about to pop anyday now haha…

  • Woj

    At the beginning of the last secular bull market, long-term Treasuries reversed their correlation from negative to positive and held that position for the entire 18-year run. Since returning to a negative correlation at the turn of the millenium, stocks have experienced a secular bear market. Whether or not that relationship is merely a coincidence is anyone’s guess but it’s worth a moment of consideration. Given the opposite starting point of Treasury yields (double digits in the early 1980’s and under 3% now), it seems unlikely that the correlation would become positive in the near-term aside from both asset classes experiencing bear markets. That being said, correlations remaining significantly negative may be a reminder that the secular bear market in stocks continues.

  • perpetual neophyte

    Is it a hated asset class? Have investors refused to embrace it?

    Last time I checked, equity funds continued to see outflows and fixed income (of which, I have to think some is Treasuries) continued to see inflows.

  • Leverage

    It advertises us that real inflation is much lower than reported maybe? What when the lower commodity prices and picking inventories start to make up their way into consumer prices? What when China, India et al. growth starts to cool down even to the negative growth camp because the previous temporary inflation, what if hard landing is unavoidable BECAUSE inflation?

    We still are in this vicious inflation-desinflation-deflation cycle of stagnation where higher commodity prices will trigger social unrest and revolutions in some countries and reduce disposable income in developed nations. Running out of cheap oil makes consumer driven economic ‘growth’ limited and the printing abilities of governments too. Higher prices mean lower prices, mean higher higher prices, mean lower higher prices, etc.

    Bullish for natural gas too in the intermediate term! Start looking for opportunities and how to position yourself in this market (futures, drilling, midstream, etc.).

  • Mr. Market

    Bonds are in a bubble, Yes. But in the $UST or $USB we still have to see the “”blow off”” phase.

  • Cullen Roche

    I wrote this almost 2 years ago. It still applies.

  • Larry

    Although fixed income funds have had steady inflows, the largest inflows are going into high-yield and corporate bond funds, and most of the bond funds are fairly low on Treasuries. So individual investor enthusiasm for treasuries is tepid. It is nothing like the mania for tech stocks in 1999.

  • B Ferro

    Seriously…and this is the type of thinking that pervades CNBC all day long by 1%-er long-only buy-siders…

    How is anything whose principal is 100% guaranteed at 100% of face value capable of even being in a bubble :)

  • Cullen Roche

    Good question. I mean, if yields really surged you might lose in real terms, but if you understand the whole point of bond investing then you ladder up and implement fixed income as a hedge against a broader portfolio. If you get wiped out investing in fixed income then you’re doing something extremely wrong and abusing the asset class.

  • B Ferro

    Yea let’s define bubble first. I’d say high probability of at least a 60% loss in real terms of original principal.

    By that definition the surge in yields required to wipe out that much of your initial nominal investment would be unprecedented in modern economies, ex hyper-inflationary scenarios obviously.

    So if we want to distill it that far, bonds are only in a bubble if the probability of hyper-inflation is incredibly high.

    All in then, I’m guessing a large proportion of the people who toss this around are hyper-inflationists…

  • Mr. Market

    1. The reason I think bonds are in a bubble and are approaching the “”blow off”” phase is that the volatility in bonds has become more extreme in the last 2 years. And the more the FED “”prints”” money/monetizes T-bonds the more money in the system and the lower the yield on T-bonds/Bunds will go. The money was intended to prop up the stockmarket but that money also can exit the stockmarket and go into T-bonds/Bunds.
    2. I recently came across an interesting chart about interest rates cycles. It seems we’re at the (very) end of a 60 year interest rate cycle. In the 1930s and 1940s interest continued to go lower because the peak in interest rates was in/around 1920.
    3. One has to look at REAL rates as well. In deflation REAL rates can become very high, and REAL rates above 10% are a killer for everyone. (Japan, anyone ??).
    4. BTW: I am long T-bonds/Bunds and the Bund future !! The shape of the graphs will determine when I sell those positions.

  • perpetual neophyte

    To preface, I think you are correct and I agree with your idea of a “bubble” requiring a pretty major loss. However…

    I think some people thinking of “bubbles” are referring to the instruments held by many individual investors these days. How many are out there buying individual 10, 20 or 30-year Treasuries and how many are buying IEI, IEF and TLT (or actively managed mutual funds)?

    If TLT drops to its value from a year ago and an individual investor loses 20% of their value, they might be unpleasantly surprised.

  • Mr. Market
  • Anonymous


  • Larry

    Mr. Market, you said: “I am long T-bonds/Bunds and the Bund future !!”
    I am also long TLT (long Treasuries ETF) and long IEF (7 to 10 yr Treasuries), but with a nervous eye out for the upcoming blow-off stage, and with my finger ready to hit the sell button. I also own a small holding in VUSTX, Vanguard long-term Treasury fund. Its 5 yr annualized return is 10.63%, so it has had a very good run over the last 5 yrs, and it has been an excellent diversifier, with a high negative corelation to SPX and most equities.

  • Sam A

    I guess the real question is why you would want to own bonds at negative yields? If you are speculating on the yield dropping further then you are not really a fixed income investor, you are a speculator. If there’s a huge amount of speculation in the bond market I would be wary of following, especially since it is very cheap and easy to lever up on treasuries.

  • Consultant

    Just attended an event where some very influental people, including ex secretary of treasury Henry paulson expressed concerns of “market pressures” on us yields because of the deficit Will be à major problem. Incredible to me that à guy with that type of insight does not understand our monetary system. Makes me pessimistic of the fiscal cliff issue. Everyone talks about responsible fiscal policy both in the us and emu, not à good sign to me.

  • Consultant

    Although bullish for treasuries