After two weeks of generally rising yields and falling prices, yields fell across all maturity ranges for US Treasury bonds.
- David W. James, senior vice president, James Investment Research
March 26, 2012
In truth, this should not be too surprising. Too many pundits were quick to condemn Treasuries. Goldman Sachs released this week a study praising stocks and suggesting it is time for the “long good-bye” for bonds. Markets often go counter to popular opinion and it seems overzealousness is almost always frowned upon; especially in the short run.
Economically this week was dominated by housing data. Unfortunately, most of it was disappointing. Data consisted of Housing Starts, NAHB Housing Index, Home Prices, New Home Sales, and Existing Home Sales-- all posted numbers below analyst’s expectations. The only indicator above expectations? Building permits. Overall there is simply too much supply and too much optimism in the housing sector.
On the other hand, there are plenty of signs of economic encouragement. A divided government in Washington is certainly a positive with fewer burdensome regulations are passed. The regional FED reports have been generally favorable. Retail sales, especially for automobiles, have been positive.
Unfortunately for bond holders positive economic news can translate into relatively poor returns. Thanks to an over-active printing press in Washington our money base has more than tripled since the fall of 2008. As the economy heats up, it is likely we will see a surprising level of inflation.
Offsetting this inflation threat we find slowing economies in Europe and China. Now reports come of Chinese firms unable to get loans, even at sharply higher interest rates, causing defaults and bankruptcies. China, with all the infrastructure construction, is rated tops among the world’s copper usage, and prices have fallen as demand is reduced. In Europe, Spanish debt has been called into question and rates are rising. Of course, problems overseas make treasury issues more attractive as a “safe haven” investment.
Presently our intermediate term bond indicators are shifting to the neutral to slightly less favorable camp, while the long term outlook continues favorable. Our latest research suggests best bond returns may now come from Agencies, good quality corporate bonds, GNMA issues, sovereign and municipal bonds. We would now seek to shorten average maturities for most accounts, with a reduced representation in Treasury bonds. Fixed income still has an important role to play for most investors in providing diversification and potential opportunities if the economy does falter later in the year.