Treasuries

The spread between Long Quality Corporates and twenty year Treasury bonds at the pinnacle is back down to a more normal range, as the Treasury shortage elimination-thesis has fallen apart due to rising budget deficits.

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We believe it is still an opportune time to add to High Yield positions. The economy is improving and corporate profits are rebounding from depressed levels.

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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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A look back at 20 prior bear markets (1900 to date) to examine the question, “Just how long does it take to recover from a bear market?”

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Overall inflationary pressures subsiding, but expect a few more energy related flare ups.

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Recent 25 basis point bump-up by Fed will not be the last. More tightening seems likely but T-bonds now look to be in the high end of a buying zone.

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How long can the Goldilocks’ economy keep going? The current economic expansion (at 25 quarters) is long in the tooth by historical standards. Inflation outlook improved. Shortage of treasury bonds to become a reality?

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Looking out ten years, can today’s overvalued stock market outperform 7% Treasury zeros?

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Economy Humming Along...Fed Not Done Yet...Inflation Still Number One Worry

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Treasury zero bonds are becoming increasingly attractive for retirement accounts and other investors who want to know with absolute certainty how much they are going to get and when they will get it. Also, preliminary Leuthold Group economic and market projections for 1995.

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The bond market's wish list was fulfilled in August. Inflation readings came in below expectations, economic signals continued to point towards sluggish growth and signs of deficit reduction progress surfaced once again.

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Long treasuries moved higher during the first half of July buoyed by favorable June inflation numbers and generally weak economic signals. However, most bond prices did an about face in the middle of the month.

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Yields remained in a narrow trading band in early June, as investors braced themselves for another volley of ominous PPI and CPI announcements. But, upon release of May's surprisingly good inflation numbers, the bond market began a steady march upward for most of the remainder of the month.

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Shorter-term treasuries finished May on a weak note, reflecting concerns over possible tightening by the Fed. Long treasuries were nearly unchanged for the month, realizing a slight gain, as the President's deficit reduction plan cleared its first hurdle.

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Corporates managed a gain in March but Treasuries were weak near month end. Developing an “unbiased” Bond Market Trend Index based on a list of factors that we feel are important in determining the overall health of the long U.S. bond market.

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All things considered, I think November's long bond market performed surprisingly well.

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Sound like a tall order? This is what the DJIA must achieve to match the total return from a 20-year zero T-bond over the next 20 years.

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Incredible action again in March. Long T-bonds are beating stocks year to date. Short-term and long-term bonds look higher and don’t ignore the possibility of a “return to normalcy” (6%) in 1986. It seems unlikely, but it could happen sooner than even we had imagined.

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Incredible February action. 8% looks like a trouble zone for a while, but we still expect to see 7.5% or lower over the next twelve months. Traders should be selling some bonds around 8%.

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