Some disappointing economic and jobs data over the last couple days sure has the market freaked out again all of a sudden. The so-called flight to safety -- you know, buying up all that U.S. Treasury debt that was just put on double-secret probation by S&P -- is back on.
As the equity market has sold off over the past few sessions the yield on the benchmark 10-Year Treasury note has also dropped, which means its price has gone up, which means traders are buying bonds. Yes, those allegedly noxious, worthless pieces of paper some bond fund managers wouldn't use as, well, certainly not as part of a portfolio, are back in vogue. (At least for a minute.)
The Treasury bond (and bill & note) smackdown has been raging (okay, not raging -- we're talking bonds here) for as long as the Fed has been pumping liquidity into the banking system with the fire hoses of quantitative easing (QE1 and QE2), also known as money printing.
The best minds in the bond business are divided as to what this means for the future of U.S. Treasury debt -- and whether it should play any part in your portfolio. As our own Eric Schurenberg, Editor-in-Chief of BNET.com and Editorial Director of CBS MoneyWatch.com, said a couple weeks ago:
Both Bill Gross of PIMCO and Dan Fuss of Loomis Sayles, two of the smartest bond managers around, have stopped buying Treasuries. Let's repeat this: Two of the most successful bond managers of their generation are uncomfortable owning the largest sector in their category.And Gross, manager of the world's largest bond fund, ain't backing down. The Fed is set to end QE2 and stop sopping up all that Treasury debt next month. That means Treasurys are poison and savers are on a collision course with financial doom, the guru wrote in his latest monthly report:
Bond prices don't necessarily have to go down for savers to get skunked during a process of "debt liquidation." The argument over whether the end of QEII on June 30 will result in higher yields and lower Treasury bond prices is, in a sense, a secondary one. Even if 10-year Treasuries stay where they are at 3.30%, and fed funds close to 0%, savers and financial intermediaries are being shortchanged by both of these yields and everything in between.Inconveniently, for Gross at least, is that when S&P put U.S. debt on downgrade watch last week, Treasury prices actually went up. (Recall that yields and prices move in opposite directions.) Less recently, when Gross shorted Treasurys ahead of the demise of QE1 last year, prices also rallied, notes BusinessInsider.com.
That doesn't mean Gross or Fuss is wrong -- they just haven't been proved right yet. But there are some smart folks on the other side of the Treasury bet, too. David Rosenberg, chief economist and strategist at Gluskin Sheff, (who presciently called the global financial meltdown years ago) is a bond bull and can make a compelling case:
The question always arises where are bond yields going from here? And the answer by nearly every pundit is that they have to go up. But they have been saying that for three years (longer even) and have constantly been wrong. In this three-year span of the 10-year yield being locked in a 2%-4% band, we...had inflation as high as +5.5% and as low as -2%. We had real GDP growth as high as +5% ... and as low as -6.8%. The U.S. unemployment rate was as high as 10.1% and as low as 4.8%. So tell us, what exactly is it you see that drives us out of the range that we haven't already seen in the past three years?That pattern in bond the market, using the benchmark 10-Year Treasury note as a proxy, has sure held firm over the last year. Look at the chart below. Yields from the end of QE1 (and when recovery hopes were running high), down through fears of a double dip, and now back to today ahead of the end of QE2? It's pretty much been a round trip.
There are some other heavy hitters among the bond bulls, too, the biggest name being Jeffrey Gundlach, founder of DoubleLine Capital and, according to Barron's, the greatest bond guy who ever lived. Gundlach thinks the S&P 500 is headed down to 500 in the next couple of years, so yeah, that would probably make Treasurys look pretty good. The well regarded economist Gary Shilling also views Treasurys favorably. Like Gundlach, he sees slower growth and deflation ahead.
Bottom line? I don't know. As an investor, the best course is to make sure you're covered either way. My colleague Conrad de Aenlle just updated his story on how to invest in bonds right now.
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S&P Cuts US Treasury Outlook - Treasury Prices Rise