Bonds had a rough ride in 2013. A combination of a strengthening economy, better job-creation and repeated warnings from the Federal Reserve that it was preparing to taper its ongoing bond purchase stimulus sent prices down, yields up and rocked what had been a safe haven for shell-shocked investors after the 2008 meltdown.
Interest rates on 10-year Treasury bonds jumped from a low
of 1.7 percent last May to a high of more than 3 percent in late December. As a result, for
the first time since the financial crisis, regular investors poured
more money into equity funds than bond funds last year.
Casualties included Pacific Investment Management Co., the world's largest fixed-income fund manager. The firm's $237 billion flagship Total Return Fund suffered a $41 billion outflow in the wake of a 1.9 percent loss for the year, the worst performance since 1994 for a fund that has posted an annualized gain of nearly 8 percent since inception in 1987.
Mohamed El-Erian, CEO and co-chief investment officer at PIMCO, on Tuesday unexpectedly announced that he was leaving the company. Neither El-Erian, who along with PIMCO founder Bill Gross, has served as the firm's public face, explained the reason for the departure.
Investor sentiment is in the pits, with small speculators betting heavily against Treasury bonds in the futures market on a scale not seen since 2006; yet commercial traders recently posted the largest long position since early 2010.
Both cases (early 2006 and early 2010) marked a short-term turning point for Treasury bonds, which were followed by multi-month rallies for bond prices. Could a repeat performance lie ahead?
Bank of America Merrill Lynch analyst Macneil Curry thinks so, telling clients that T-bonds have "turned medium term bullish" and to "get ready to buy a dip" in bonds. He expects the yield on 10-year Treasuries to fall to 2.5 percent, re-testing the October lows.
What could be the catalyst? Any number of market worries, from a possible default in China's shadow-banking system to partisan rancor in Congress as lawmakers face a deadline to raise the debt ceiling, could do it. Anything to reverse, at least temporarily, the flow of investor cash out of bonds and into stocks.
To take advantage, I've already recommended that clients prepare for a bond rebound via ETFs such as the iShares 20+ Year Treasury (TLT) or the leveraged Direxion 3x Treasury Bond Bull (TMF), which is up 2.5 percent in my Edge Letter Sample Portfolio since it was added earlier this month.
Disclosure: Anthony has recommended TMF to his clients.