Treasury yields near 60-year lows

Although the government bond market was dramatically different during the Great Depression (back then, I think the so-called government bonds were railroad bonds, and not US government issued debt), the fact is the yield on the 10-year Treasury equivalent is approaching lows today not seen since the late 1930’s, early 1940’s.

To be an effective blooger we dont plan on telling readers something they can clearly read in the Wall Street Journal or any of the multiple investment news sources these days, but what i did want to say was that, despite record low yields on Treasuries, the interesting fact about this asset class is the rampant bearishness on the part of institutional investors for Treasuries, and their equivalent, despite the fact that this is one of the best performing asset-classes over the last 12 years.

And therein lies the rub: as stock market returns have undeperformed Treasury bills over the past 12 years, and longer-maturity Treasuries have been on fire, according to Jim Bianco of Bianco Research (a Chicago-based market and statistical research firm that does excellent work), the vast majority of institutional bond investors have been “short” their duration benchmark, mostly since the March, 2003 equity bottom.

In other words, the majority of instututional investors have been anticipating rising rates for about 10 years now, and have been clearly wrong.

Even Alan Greenspan referred to this phenomenon as “The Conundrum” in 2005 – 2006, what with the economic recovery and the strong housing market back then, Treasuries never really cracked and the longer-dated paper held its bid despite the Fed raising short-term rates, which we now know was a warning sign for what was to come in 2007, and 2008 in terms of the banking system.

If readers want a simple data point to watch in terms of the health of this US economy, stock market, and recovery, I continue to think that data point is the 10-year Treasury yield, similar to European market-watchers watching the Italian, German and Spanish government debt. (My friend Jeff Miller, who writes the “A Dash of Insight” blog has written a few times that the key metric to watch in Europe was the Italian 10-year government bond yield. The country might change, but the world’s bond markets are really taking the temperature of what is happening economically and politically the last few years.)

Credit spreads continue to hold on pretty well during this recent swoon, which as a manager of client money has given me some comfort, but the two high-yield ETF’s – the HYG and the JNK – are currently testing their 200-day moving averages, so it would be helpful to see the credit markets make a stand here.

I believe the all-time low yield tick for the 10-year Treasury was 1.67%, and we are perilously close to that today. Personally, i dont think anything good happens regarding the US stock market (outside of mortgage refi’s) if we take out the 1.67% low yield in the next few weeks.

No Treasuries, long TBF (Treasury short ETF), overweight credit in client portfolios

 

 

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