10-Year

We still think interest rates are likely to be range-bound, but the range will likely shift higher to the 185-240 bps area if the current breakout is successful.

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The failed break-out to the upside on the U.S. 10-year yield fits our expectation of a range-bound but higher-volatility environment.

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Going forward, at least in the near term, we think a good guide for the potential downside on U.S. interest rates might be the German bund yields.

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Inflation is still below the Fed’s target and near term pressure is only moderate. This gives the Fed some room to ease further if the economy falters.

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Today’s bond market is reminiscent of the stock market in April 2000—when the first cracks in tech and telecom had appeared.

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Bond Market Risk Aversion Index fell in December, resulting in a new “lower risk” signal that closed out the “higher risk” signal which occurred back in May. We are now cautiously optimistic.

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Andy Engel revisits our Stock/Bond Performance Differential study which examines rolling stock/bond spreads over various time periods and subsequent asset class returns.  It appears that trends are finally reverting slowly toward the norm.

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The Risk Aversion Index edged up during November. It is still on a “higher risk” signal. We will stay defensive and be patient. Higher quality assets within the fixed income space are favored.

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Jim Bianco observed in September that Europe was still in a “pre-Lehman” mentality regarding its debt crisis, in which investors and policymakers “were worried more about the equity and propriety of where taxpayer money was going than about fixing the problem.”

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U.S. likely averted worst-case scenario of default, but credit rating downgrade is still likely. Main impact of downgrade is not the increase in interest rates itself, but rather the liquidity risk in all markets that involve treasury securities as collateral.

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Doug Ramsey examines several once very reliable relationships between stocks, bonds, inflation, and commodities.

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History appears to be repeating itself as the risk premium for stocks is making a comeback. Ten-year Treasuries are now the riskier asset class compared to equities.

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Stock/bond Risk-reward relationship beginning to return to normal. Back in Q1 2009, performance differential between S&P 500 and 10 year T-bonds was at generational lows. In prior periods of bond superiority, stocks ultimately came soaring back. Expect to see stocks do much better over next 5 years.

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At the end of November, The Leuthold Group established a 7% short position in long-term Treasury bonds across all tactical asset allocation funds (Core, Asset Allocation and Global). We view this as a longer-term position.

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The longer term data does suggest that at current interest rate levels, investors can expect sub-par returns over the next 1, 3, and five year timeframes— and we use the term “sub-par” quite literally.

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Inflation pressures have not yet abated and we believe that bond yields could tick up later this year, as those pressures eventually flow through to the CPI. 

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Is the Fed ready to buy Ten Year Treasuries to stimulate the economy? This could certainly lead to another housing/refi boom. But are lower rates really necessary to boost business spending?

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Many of the questions in this month’s issue came from November’s client meetings in San Francisco.

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