Skip to main content

Bond market update & outlook

According to Bloomberg News, the current turmoil in the debt markets arising out of the recent subprime and CDO mess is benefiting Treasury bond prices.

In fact, their recent article on Bear Stearns' effect on the treasury market even goes so far as to say that Treasury investors should be thanking Bear Stearns for "smothering the bear market" in bonds.

Here's why:

Traders who cut their holdings of U.S. government debt just a few weeks ago as retail sales increased and job growth accelerated are now snapping up Treasuries. Demand is being fueled by speculation that losses at hedge funds owning subprime mortgage bonds such as those managed by New York-based Bear Stearns and London-based Cambridge Place Investment Management LLP will spread and slow the economy.

The article goes on to detail past instances in which panic among investors and speculators has led to a "flight to quality". These periods of panic and risk reassessment are usually brought on by the sudden failure of a large investment fund, a catastrophe, or threats of war and geopolitical strife.

Indeed, subprime worries are not the only reasons being offered
today as bond prices rally. As Reuters explains, government bond prices remained firmly higher today due to security fears in Europe and the Middle East.

U.S. Treasuries rose on Monday, sending 10-year yields below five percent for the first time since early June, as global bonds rallied on recent security worries and shrugged off strong U.S. factory data.

Traders said attempted car-bomb attacks in London on Friday, Saturday's attack on Glasgow's airport in Scotland, and the killing of seven Spanish tourists and two Yemenis in a blast in Yemen kept a constant bid in the Treasury market.

Now that we've heard the explanations for the short-term movements, let's move on to the larger question. Is the bear market in Treasury bonds likely to be over ("smothered"?) due to the recent flight to quality in the debt market?

In my non-expert opinion, I would have to say no, this is not an end to a bear market in Treasury bond prices. If anything, we are closer to the beginning of such a move. Why?

Interest rates are very likely to go higher over the longer term, and the cycle towards higher interest rates (and higher inflation) has only been in force for the past two or three years.

The last big interest rate cycle in the West was the 1981-2003 downward trend in US interest rates which coincided with the twenty year-long bull market in bonds (I believe that's how people now refer to the period).

The next long term cycle is therefore likely to be a long-term rise in interest rates and a longer-term bear market in bond prices. Anything happening now is probably a short-term distraction from the bigger picture trend.

But the main thing to point out is that, whether I'm wrong or right on my forecast, we have to appreciate the importance of separating the shorter-term movements ("noise") from the structure of the longer-term trends.

While the event-driven moves make headlines on a day-to-day basis, we have to distinguish them from the greater overall picture and put their importance into the proper perspective.

Of course, if your investment or speculation horizon is much shorter, and short-term events take a dominant share of your attention, then these longer-term considerations may not mean much to you. But to those who are looking out to the farther horizon, these distinctions are important to make.

Popular posts from this blog

Seth Klarman: Margin of Safety (pdf)

Welcome, readers! Signup for free email updates at the Finance Trends Newsletter . Update: PDF links removed due to DMCA notice. Please see our extensive Klarman book notes below. New visitors, please check the Finance Trends home page for all new posts. Here's something for anyone who has been trying to get a look at Seth Klarman's now famous, and out of print, 1991 investment book, Margin of Safety .  My knowledge of value investing is pretty much limited to what I've read in Ben Graham's The Intelligent Investor (the book which originally popularized the investment concept of a "Margin of Safety"), so check out the wisdom from Seth Klarman and other investing greats in our related posts below. You can also go straight to Ronald Redfield's Margin of Safety book notes .    Related posts: 1. Seth Klarman interviews and Margin of Safety notes     2. Seth Klarman: Lessons from 2008 3. Investing Lessons from Sir John Templeton 4.

Moneyball: How the Red Sox Win Championships

Welcome, readers . T o get the first look at brand new posts (like the following piece) and to receive our exclusive email list updates, please subscribe to the Finance Trends Newsletter .   The Boston Red Sox won their fourth World Series title of t he 21st century this we ek. Having won their first Se ries in 86 years back in 200 4, the last decade-plus has marked a very strong return to form for one of baseball's oldest big league clubs. So how did they do it? Quick background: in late 2002, team own er and hedge fund manager, John W. Henry (with his partners ) bought the Boston Red Sox and its historic Fenway Park for a reported sum of $ 695 million. Henry and Co. quickly set out to find their ideal General Manager (GM) to help turn around their newly acquired, ailing ship. This brings us to one of my fav orite scenes from the 2011 film , Moneyball , in which John W. Henry (played by Ar liss Howard) attempts to woo Oakland A's GM Billy Beane (Brad Pi

William O'Neil Interview: How to Buy Winning Stocks

Investor's B usiness Daily founder and veteran stock trader, William O'Neil share d his trading methods and insights on buying winning stocks in an in-depth IBD radio interview. Here are some highlights from William O'Neil's interview with IBD: William O'Neil's interest in the stock market began when he started working as a young adult.  "I say many times that I didn't get that much out of college. I didn't have much interest in the stock market until I graduated from college. When I got married, I had to look out into the future and get more serious. The investment world had some appeal and that's when I started studying it. I became a stock broker after I got out of the Air Force."    He moved to Los Angeles and started work in a stock broker's office with twenty other guys. When their phone leads from ads didn't pan out, O'Neil would take the leads and drive down to visit the prospective customers in person.