Best of the Bond Market for March 20th, 2012
Making the Case for Treasuries – Our Take: Earlier today we posted an article from iShares asking the question “US Treasuries, Is this the End“? There are no shortage of people who agree with the author of that post that the answer is yes. However there were lots of people who said this in 2010 and 2011 as well and what happened? Rates dropped substantially from their already low levels making the contrarian investor lots of money.
In today’s top story we are featuring a video of bond fund manager Robert Kessler making the case that the end of the bull run in treasuries is not over, and in fact could have a lot farther to go. Here are his main points:
- Wall Street does not make money when you buy treasury bonds which can be done by anyone commission free. With this in mind they have no incentive to recommend buying treasuries and every incentive to promote other investments where they can earn a commission, like stocks.
- Many economists feel that by the end of next year inflation will be at less than 1%. In other words contrary to popular opinion inflation is going to fall significantly from here.
- Europe is far from out of the woods yet, and we are starting to see more and more headlines from China, point being that the positive news flow of late which has let to a selloff in treasuries as investors get more optimistic and move into stocks could quickly reverse.
Wether you agree with him or not, I think its important to consider his points, especially when everyone and their mother is calling for a top in treasuries.
Update on July 2013: The US Treasury Rate has not gone to 1%, In fact it never reached 1%. Its currently trading around 2.7% and our forecast is for the rate to trade between 2.5% and 4.0%
Tweet and Article by @cate_long
A Municipal Bankruptcy Does not Ruin a State – Our Take: Another good one from Cate which exposes the fallacy that when a municipality within a state goes bankrupt it affects the credit of other municipalities within the state and the state as a whole. Cate sums it up well in the article: “The politicians gripe that when a municipality in their state goes into Chapter 9 bankruptcy, it affects the cost of borrowing for the state and other issuers located there. But this rests on the false assumption that markets do not discriminate between different borrowers. Municipal bond issuers, like public companies, are looked at individually because every entity has its own story.”
Tweet and Article by @blackrock
Seek Income in Different Places – Our Take: Article makes the case for high grade corporate bonds as companies are flush with cash and the yield spreads over treasuries “still reflect investor angst rather than fundamental weakness“. Article also makes the case for Dividend paying stocks which “for many companies yield twice as much as benchmark treasuries“. We also suggest that yield hungry investors have a look at High Yield Muni Bonds.
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