Top 10 Reasons Why Yields Have Fooled Investors
So, if you were a "macro" guy/gal, you were likely tempted to come into 2014 short bonds, because, hey, everybody knows yields are going up.
The Fed is tapering, the economy is improving, and this trade is a no-brainer, right?
But for those of you keeping score at home, the Ultrashort 20+ Year Treasury ETF (NYSE: TBT) is down -17.2 percent year-to-date as of Tuesday's close.
Here are the top 10 reasons why the macro crowd has gotten it wrong on the bond market in 2014:
1. Blame it on the Weather - Anyone living east of the Mississippi knows that this past winter was brutal. And the bottom line is people don't spend a lot when they are holed up at home trying to stay warm. So... the U.S. economy hit a speed bump/soft patch during the wretched winter months.
2. China's #GrowthSlowing - If you've been paying attention at all, you know that China's economic growth rate is slowing (GDP growth has fallen from about eight percent to 7.4 percent). The key is this is affecting global growth, which causes investors to stick with conservative stuff like bonds.
3. The Emerging Markets Currency Mini-Crisis - Frankly, you can't be blamed if you have forgotten about this one already. In short, if you blinked, you missed it as the purported crisis was over before it started. But if the word "crisis" hits the headlines enough, yields WILL fall.
4. Russia/Crimea/Ukraine - Ditto. Geopolitical tensions equal falling interest rates.
5. Deflation Worries in Japan - While this isn't exactly new, concerns about deflation in Japan remain a concern.
6. Deflation Worries in Eurozone - Although the European debt crisis finally ended in 2013, the latest concern has to do with deflation. As such, hopes for new stimulus measures abound. And yes, this causes yields to fall.
7. More QE in Japan - Word is that Abenomics is getting ready for another round of QE. More bond buying means higher prices and lower yields.
8. The ECB To Join the QE Party - While "Super Mario" and friends have taken their sweet time, it looks as if the ECB is about to launch a QE program of their own. And what does this do to bond yields? Oh yea, that's right...
9. Janet Yellen Is Still Janet Yellen - Yes, the Fed is tapering. But at $10 billion a month, it's clearly a "taper lite." And in exchange for the taper of the Fed's QE, Janet Yellen let us know that she's still an uber-dove by extending the period of time before rates are expected to rise. And Ms. Yellen told investors that the "glide path" to higher rates will be VERY shallow.
10. China Stimulus - Don't look know, but the Chinese are starting to take stimulative measures. And while the PBoC isn't likely to launch any big plans, the weak economy means the central bank must remain supportive. And the key is that economic stimulus is ALWAYS good for bond prices.
To find out how the bears got it wrong on bonds...again...click here.
So there you have it; yet another reason why traders should prefer to use rules and models to guide our investment decisions instead of effectively guessing as to what is going to happen next.
While this approach isn't perfect (far from it!) and stumbles from time to time, it also keeps us out the BIG problems that can occur when you get a macro call dead wrong.
Will rates continue to fall? Will stocks succumb to the meaningful decline that everyone is looking for this year?
Frankly, who knows.
But traders can be ready to take action when/if the models say that the odds favor the bears.
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