Market Overview

Bears Got It Wrong Again - On Bonds

Bears Got It Wrong Again - On Bonds

There are investors that are not big fans of basing investment decisions on one's "macro view."

Such an approach would appear to be anchored in logic. The first step is to establish a macro view of the world.

In other words, a trader must first decide what is likely to happen to the economy, interest rates, inflation, stocks, currencies, commodities, etc.

Simple, right?

And then from there, invest accordingly and wait for the thesis to play out.

That's how Paulsen made his billions, right?

The problem is that most can rarely predict what one market is going to do next week, let along figure out what a slew of markets are going to do over the next year.

See also: The Top 10 Reasons Why Yields Have Fooled Investors

Exhibit A in my argument against average investors utilizing a "macro view" approach would be the current "consensus view" on interest rates.

Something Everyone Knows...

The phrase "something everyone knows isn't worth knowing" really applies here.

Ask yourself, what did just about every analyst on the planet expect interest rates to do in 2014? If you answered, "go up," go ahead and give yourself a gold star because you nailed it. Yep, that's right; most everyone, everywhere expected to see rates rising in 2014. And what have they done so far, you ask?

Check the chart below.

30-Year Treasury Yield - Daily


Hmmm... the yield of the U.S. Gov't 30-Year Treasury Bond has moved from 3.964 percent on December 31, 2014 to 3.503 percent as of Tuesday's close (which is up from the year's low of 3.454 percent seen three days ago).

This means that the yield on the 30-year has FALLEN 46 basis points - a decline of 11.6 percent - in less than four months.

What gives?

As Paul Schatz of Heritage Capital LLC wrote on Tuesday:

  • IF the employment data are improving…
  • IF retail sales remain strong…
  • IF the Fed is tapering because the economy is doing better…
  • IF consumer sentiment is constructive…
  • IF shipments at Port of LA see largest increase in seven years…

Then why is the most economically sensitive bond’s yield falling out of bed like something dark is lurking?
Why indeed, Paul?

And for the record, Mr. Schatz has been bullish on bonds for the majority of 2014 - nice call.

Tags: bears bonds Heritage Capital

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