Presently, our indicators are neutral and reflect the current conditions of opportunity and risk. In this environment a “Goldilocks” approach of being neither too aggressive or conservative makes sense.

-David W. James, senior vice president, James Investment Research

April 16, 2012

A funny thing has happened to the Treasury market since their much publicized death knell just a few weeks ago; namely they have rallied. It continues to be one of the great historical truths to investing that if everyone jumps off or on the bandwagon the prudent investor heads the other direction.

Over the last four weeks the 10 Year Treasury Bond has seen its yield decline from just over 2.3% back down to the 2.0% threshold. Unfortunately, the disbelief in Treasuries is fading. Goldman Sachs, which recently trumpeted that it was “the long good bye” for Treasuries and shorted the Treasury market, has been chastised and has decided it no longer makes sense to be pessimistic.

While their timing may have been poor there are reasons for concern. Supply has grown at a dizzying pace. Over the last five years the total net issuance of Treasury bills and bonds has grown by 150%. Meanwhile we are left to wonder about demand. The Federal Reserve’s latest move, Operation: Twist, is reaching its’ conclusion and further moves are not yet being advanced.

Furthermore, the need for additional Treasuries is coming. Washington is in disarray having gone over 1,000 days since it last passed a budget. Indeed, federal spending has outpaced receipts for 41 consecutive months; a dubious record. The White House is proposing the “Buffett Rule” to try and receive extra tax dollars from millionaires. This solution is a mathematical non-starter. There simply are not enough millionaires to make up for Washington’s spending ways.

While these are concerns there are favorables as well. Inflation, as measured by the CPI, has been settling lower. Further peaks could come in response to our excessive monetary growth; it has not yet reached troubling levels.

High quality bonds are also likely to respond favorably to international concerns. Europe continues its economic upheaval. North Korea and the Middle East provide their own unique tensions. In times of turbulence investors seek the safety of high quality bonds.

Presently, our indicators are neutral and reflect the current conditions of opportunity and risk. In this environment a “Goldilocks” approach of being neither too aggressive or conservative makes sense.