Brian Reynolds on Treasuries
Dec 22
More on Treasuries and Their Impact
Equity managers of all stripes dislike them, but other investors don't necessarily agree
The response to our column on Friday about how the "carry trade" has regained favor reminded us how hated Treasuries are as an investment class amongst equity managers. That sentiment is shared by both equity bulls and bears.
Many equity bulls think that Treasury yields are bound to rise as the economy and stock markets climb. They think that such a rise in yields would be less of an impediment to recovery than a natural response to economic strength. Many equity bears think that yields are bound to rise because they believe the decline of the dollar over the last year and half will eventually cause foreign investors to dump their Treasury holdings, and that the rise in yields will destabilize equity markets.
This sentiment also extends to the popular media. We've read countless stories that contain the phrase "as yields rise", yet here we are at the bottom of a nearly-three-month old yield channel.
It's important to remember that bonds are just pieces of paper and thus should be immune from trading emotions. We've written that we don't think Treasuries offer good value, and have underweighted them in our personal portfolio. We still own some, however, partly because they are one of the few instruments that pay something while potentially benefiting from global tension, but largely because of the potential factors that we wrote about on Friday. While Friday's column wasn't a prediction that yields will move lower, it should remind investors that there are large segments of the investing community (e.g. fixed income hedge funds and mortgage investors) who will buy Treasuries when it either makes economic sense for them to do so, or because they have to. Because such buying (and selling, when the process works in reverse) can lead to turmoil in the agency, swap, corporate bond and stock markets, it must be monitored.
Side note:
The Wall St. Journal's Ahead of the Tape column picked up on our Friday comments in this morning's edition on the front of the Money and Investing section, page C1
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From today
Everybody Hates Treasuries
...or so it seems
I've written that many equity investors, both bulls and bears, intensely dislike Treasuries as an asset class at these levels. I've also written how bond managers have disliked Treasuries throughout this Fed easing cycle, except for times of crisis and panic. Today, we got some more evidence on that last point.
Bloomberg reported today that dealer Reid, Thunberg's weekly survey of bond managers' attitudes toward the 10-year Treasury fell to the lowest level since September of 2000. It should be noted that the 10-year was trading at about a 5.80% level back then, and fell to a 5.11% by the end of that year before falling to the 4.70% area before 9/11.
So, it seems that everybody hates Treasuries, at least in public. While I've written that Treasuries aren't appealing at these levels, that doesn't mean that they are a flat-out short either, because mainstream investors seem not to have many Treasuries left to sell, and because the group of investors that tends to fly under the radar (the fixed-income hedge funds), seem to put on the carry trade whenever the opportunity presents itself. |
