The Pollyanna Stock Market Is Back, But So Are Bonds
The Pollyanna stock market is back. After a quick decline, the USequity markets reversed their downtrend and are nearing highs onceagain.
Investors are still fleeing high-beta stocks for less-volatile sectors,indicating that despite a continuing rise in the market, investors areworried about taking too much risk in their portfolios.
Meanwhile, risk-adverse investors continue to pour money into USTreasuries as the risk of a slowing economy leading to further Fedaction becomes a real possibility.
While rates are historically low, they can and may go lower. Japanand Germany, two major influences in the global macro picture, haverates that are currently lower than US Treasuries.
As economic numbers continue to worsen, we believe a greatrisk/reward opportunity lies in US Treasuries instead of equities.
Lastly, the Federal Open Market Committee (FOMC) meets this week.Investors will be keeping a close eye on any changes in policy stanceamong members as some believe the Fed should be slowing down itsefforts.
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Our proprietary trading model has given a buy signal.
In addition, the downtrend in prices that has been in place since lastsummer, seems to have reversed:
Source: Thomson Reuters
Inverse Relationship Of Yield And Price
Investors should understand the inverse relationship between bondyields and bond prices. As yields drop, prices rise.
More and more investors are no longer holding bonds until maturitydue to low rates, but are using them as a trading vehicle.
This changes the risk profile of bonds and may lead to moreequity-like volatility in fixed income markets as investors try to guessthe Fed's next move.
US Vs Germany Vs Japan?
While the yield on 30 Year Treasury Bonds remains low:
In Germany (Europe’s main growth engine) yields are approximately35% lower – despite being viewed as a potential riskier investmentdue to problems in Euro countries.
Typically, investors should be rewarded with higher yields for takingmore risk:
And Japan's 30 year yield is 77% lower than US Bonds:
The Fed Is Stuck
Consumer spending remains volatile and declined in the first quarter –not the sign of a healthy economy.
The US is a consumer-based economy. Without a rising trend inconsumption, the Fed must continue its quantitative easing to preventa further slowdown.
Source: Bureau of Economic Analysis
As US consumer spending continues to slow, the Fed must continue itscurrent monetary program to prevent the US economy from stalling.
Deflationary concerns will also help Ben Bernanke's argument to keepthe current monetary policy in place as other FOMC members mayargue otherwise.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.