Bond Yield

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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The Risk Aversion Index fell sharply during October. Despite the sharp drop in the index, it has not fallen enough to generate a new “lower risk” signal. Our take on the current reading  is “wait and see” with a bias towards lower risk.

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As we expected, the U.S. downgrade was digested by the market fairly quickly and attention turned to the economy. This is a bear market in confidence, more than anything else.

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An orderly decline of the dollar is not necessarily a big concern. On the other hand, a sudden collapse of the dollar, in conjunction with spiking U.S. interest rates, would be a terrible thing. So far this has not been the case.

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 Expect stock prices and interest rates to move higher together for a while. There are plenty of examples of this historically...although some of them go waaayyyy back.

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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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Last month, using Ben Graham's model, we found the U.S. market to be undervalued for the first time in about 50 years. Unfortunately, the values have become even more compelling over  the past five weeks.

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In trying to assess how far the Fed may ultimately be forced to cut rates, the price action in short term Treasuries and historical yield relationships may offer some clues.

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Bond market targets were increased in July, based on rising global rates, strong global economy and expected inflation acceleration.

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Steve presents his mid year outlook for “Alternative Investments”

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Expect economic expansion to pick up a bit after weak first quarter, but a 2008 recession is a possibility. 

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Expect economic expansion to pick up a bit after weak first quarter, but a 2008 recession is a possibility. 

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Expect economic expansion to slow down in the second half. A 2008 recession is a possibility.

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We know we’re not the only ones to have noticed, but the old economic rules of thumb haven’t been working in the U.S. bond market for some time. 

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Our call for a bond market correction did not pan out in October, but yields did back up in early November as weak productivity and a surprisingly low unemployment rate were released.

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Continue to project higher interest rates over the next six months, particularly longer maturities. Further Fed action will be more “data driven”.

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Based on our 6-12 month yield targets, short end of the yield curve looking more attractive.

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A look at the things we did well in the past year, the areas where we could improve, and those things that were downright wrong.

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Still view long rates as potentially vulnerable to strong economy and unexpected inflation.

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Still bearish on the bond market based on rising inflation and further Fed tightening.

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