Treasury Bonds

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 new deal reached by Congress has little substance and no impact at all until 2014 or beyond. More “kick the can down the road.” Long term debt/deficit issues remain unsolved.

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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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The inability of our politicians to recognize and resolve short and long term debt/deficit issues has caused many of us to lose even more confidence in Washington.

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$4.8 trillion of the additional $9 trillion in debt that Uncle Sam is expected to incur over the next decade is interest obligation.

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In mid-May, we re-initiated a short position across all three tactical funds in U.S. Treasury bonds.

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Long term interest rates could continue rising, as inflation expectations increase and investors demand higher yields.

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Bond bubble deflating, as investors demand higher yields to compensate for rising inflation and mountain of debt.

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The bond bubble is deflating, as investors demand higher yields to compensate for expected rising inflation and the U.S. mountain of debt.

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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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It’s easy to see why equity investors are so down when looking at updates of the long term stock market performance. It’s even more depressing when long term equity returns are compared to bond returns.

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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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Jim Floyd is boosting his 12 month interest rate targets by about 50 basis points across the board. The economy is expected to be showing signs of recovery by year end 2009, and the credit markets are thawing.

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Since economic fundamentals are providing little help lately, an understanding of bond sentiment has become especially helpful.

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Expect economic recovery to pick up a little steam in early 2007, before slowing down in the second half. A 2008 recession is a possibility. 

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Despite the December correction, our 10-week Hines ratio (a modified put/call ratio) continues to show rampant speculation in T-bond futures call options, suggesting speculators are still betting on declining yields. 

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Does consumer confidence offers any insight into future spending patterns? Also, the case for shorting T-Bonds.

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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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Big Rise in Treasury yields has resulted in improved risk/reward profile for T-bonds.

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