Bond Yield

We like to think our models and indicators help us preserve a high degree of market objectivity. But sometimes we wonder: the latest rally has progressed to the point where we see trouble afoot in both the strongest and weakest charts we can find.

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Despite the improvement in market sentiment, U.S. bond yields were dragged lower by their international counterparts.

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Last month we discussed the negative market implications of May’s “Death Cross” signals in the Dow Transports and Dow Utilities.

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Our current view is the lift-off will be December or later. Assuming inflation will pick up and the Fed hikes the rate by the end of 2015, stocks will perform relatively well, with international stocks a better bet than U.S. stocks.

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The severity of the market’s current overvaluation depends on one’s historical vantage point.

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The 10-year real yield turned positive at the end of 2012 and has stayed there. We expect higher interest rates, a stronger dollar, and lower gold prices in the next twelve months.

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Models based on so-called relative valuations have a poor track record in practice, having misled investors at several historic inflection points. Interest rates have virtually no impact on stock market valuations, but they may have transitory effects on stocks in the short term.

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The recent upside breakout in the U.S. 10-year yield was successful, and it appears interest rates will remain in the new higher range for now. But what are the short-term implications of higher U.S. Treasury rates on asset allocation decisions?

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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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We think interest rates will stay low for an extended period of time, so the key question is, when will rates start rising?

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Those adopting LDI today are doing so at the least opportune time in more than 60 years.

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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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Investor infatuation with portfolio income is higher than ever, just as there is less of it available than at any time in history.

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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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An examination of this historical relationship turns up some interesting findings that challenge the traditional disposition.

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Whether it’s the start of a new bond bear market or not, there’s no need to rush... and why shorting bonds may not be the best idea, even during a bond bear market.

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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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From the stock market to politics to football, Doug Ramsey offers up ten predictions and thoughts for the New Year…. Even though we’ve already had a one month “peek” at 2012.

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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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