6.25.13: The Mixed Messages the Bond Markets are Sending

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Here are two bond market charts that look eerily similar, but should in fact be heading in opposite directions. Frankly, I would think either could be bought right here, with stop losses at the 200-week moving averages,  to protect investor capital.

The first chart of the TLT ETF, is the 20+ year Treasury ETF, that has gotten smoked as the yields on the long end of the curve have risen substantially on worries over Fed “taper” (supposedly).

The second chart is the HYG ETF, which is the corporate high yield bond market ETF, which has seen credit spreads widen, (and prices fall) and I’m not sure why.

One or the other chart has this economy wrong: if the Fed “taper” is as much about better economic growth, then the TLT has it right (i.e. stronger economic growth and higher inflation expectations) and the corporate high yield bond market has it wrong and credit spreads have widened. If the Fed is tapering, and the economy is weakening as the high yield ETF seems to indicate, the TLT has it wrong, and is a screaming buy here.

My own opinion is that:

a.) The US econony will continue to improve;

b.) Corporate high yield and credit spreads should offer better relative value than pure Treasuries (by a wide margin) over the rest of the year;

c.) The risk in the bond markets is that the US economy is stronger than many think, again this should favor corporate bonds and corporate high-yield bonds.

The widespread and undifferentiated selling in the bond markets the last 2 months, is reminiscent of the Nasdaq correction from March to May of 2000. Everything tech and large-cap growth related was taken out and shot in a 60 – 90 day period in mid-2000.

Value is being created as we speak. I do think that interest rates are reaching a point where the fever will break, albeit temporarily, but there is value in the bond markets today.

Panicked markets creat value. There is value in these bond markets today.

We just bought a slug of HYG for client accounts this morning.

Trinity Asset Management, Inc. by:

Brian Gilmartin, CFA

Portfolio manager


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