On the Contrary (Again) for Long Bonds
While most eyes have been gazing skyward for a view of stock market tops, mine have been scouring what looks more and more like the lows of an oversold bond market. The stock market appears as if it will continue to steam along with some brief sell-offs, and it will likely climb through another cycle before it spins off any major indications. The more interesting story is the long bond market which has all but been left for dead by the rest of the street, and that makes me all the more interested.
If you’ve been following along with me for the last year, you know that I still see some upside for the long bond, this in the face of a mass exodus of bonds and bond funds by institutions and small investors alike. Of course, that is what being a contrarian is all about.
A brief history:
November 2009 – I primed the pump, suggesting that it may be time to begin accumulating long bonds (Picking at Your Turkey, Nov 2009)
Spring 2010 – Bill Gross of PIMCO issues warning on long bond suggesting its run is over
Spring 2010 – We initiated aggressive buying campaign in long bonds
August 2010 – After a 5 month, 15 point rally in the long bond, we liquidated our positions
December 2010 – Following a 4 month, 12 point decline in the long bond, I intimated that things were looking interesting again for bonds (Outlook for the Long Bond, Dec 2010)
December 2010 – January 2011 – Massive outflows from bonds and bond funds as investors run for the hills. Good sign.
February 2011 – As the chart below indicates, we may be right where we were back in the spring. I’m feeling an itch.
So, here we are two months later and the signals are gaining strength again, the strongest of which is that small investors have almost completely abandoned bond funds, the key sign that all contrarians like to see. Additionally, we’re hearing more and more talk about the return of inflation which is supposed to scare us away from bond investments.
Technically speaking, the case can be made that the long bond is approaching an oversold position and is due for a bounce. Fundamentally, the long bond can be expected to bounce along with a feeble economic recovery which is not likely to produce any marked change in the inflation trajectory, allowing the Feds to maintain downward pressure on interest rates. In the meantime, Treasuries are still the haven of choice for domestic and foreign institutions when things start to go south.
With all of that said, it’s the extended weakness in bonds which has everyone running in one direction that has me wanting to run in the opposite direction. Stay tuned.
