Wednesday, September 1, 2010

'Bond Bubble' Mash-Up.....

For the past few weeks there has been increasing chatter about bonds being in a bubble.  I've put together a few links I think are more insightful on the topic (they also reveal when I stand on the issue):

http://globaleconomicanalysis.blogspot.com/2010/08/question-are-stocks-screaming-buy.html

http://pragcap.com/is-it-time-to-get-out-of-bonds

http://pragcap.com/the-myth-of-the-great-bond-bubble

https://ems.gluskinsheff.net/Articles/Breakfast_with_Dave_081910.pdf

http://www.ritholtz.com/blog/2010/06/on-the-treasury-bubble/

http://behaviouralinvesting.blogspot.com/2010/08/bond-bubble-sterile-debate-on-semantics.html



For a historical perspective, yes, US interest rates have been this low before:

http://www.bespokeinvest.com/thinkbig/2010/8/26/how-low-are-bond-yields-really.html
And no, the world did not end and the US economy did not collapse when rates began to rise.

For those of you screaming that it's different this time!  It might well be, we are experiencing a debt deflation environment.  And maybe the bond vigilantes will finally arrive at our shores.  But more likely, they won't any time soon, if ever.  If we're truly at the glue factory, the U.S. is still the best looking horse for investors to bet on.  The U.S. is not Greece, or Spain, or Italy, or Portugal, or Ireland, or Mexico, or Brazil, or Argentina.  In fact, all of their GDPs combined are only about 50% of the U.S.  I'm not saying the U.S. can be complacent on the deficit, but I am saying the U.S. does get to play by a different set of rules than most other countries.  For individual players, the world tends to be relative long before it becomes absolute.

And for those of you who think the US yield curve can't possibly flatten even more I encourage you to go look at year over year changes in Japan's yield curve beginning in 1990.  In the 1990s the no-brainer, can't miss trade of the decade was shorting the Japanese long bond.  Traders are still waiting for that trade to pay off.  I'm not saying the US is Japan, but I am saying it is absolutely absurd to take the position it can't happen here.


Where does this leave us?  Moderation in all things.  Much like this article suggests:
http://advisorperspectives.com/commentaries/oak_081910.php

And when rates do finally start to rise (because, someday, they will), it won't be nearly as damaging as you think.  Bond bear markets are not equity bear markets.  Read about it here:


http://www.vanguard.com/pdf/icrrol.pdf

Finally, Wayne Whaley has put together how equities perform in different interest rate environments:
http://www.tradersnarrative.com/what-do-rates-rising-from-zero-mean-for-equities-3287.html
Kind of makes you bullish on equities, doesn't it?