The Shaking of the Rattlesnake’s Tail?

For years, analysts have been predicting the collapse of the 30 year bond rally. Since 1982, bond prices have generally be rising at a rate without near-term historical precedent. In early 2009, it was widely thought that it was the end of the bond price rally as Treasury rates were pushed to historical lows (yields and prices go in opposite directions).

As it turned out, those who sold out of bonds would have missed out on another three more years of growth – especially in 2011. For what it’s worth, the “selling out of bonds” early crowd would have been in good company with some of the most famous and reputable bond experts of all history.

As it turned out, late 2008 was not going to hold the record for long for low bond yields and the record would be broken again in the autumn of 2011. The key thing to keep in mind is what bond analysts are looking at when they say this and why they were wrong and most importantly that people can be only temporarily wrong. At each of these points in history bonds were at their lowest yields in history and generally that means that at certain point they can only go up. 2011 was unique when the yield on the 10 year Treasury fell below the average dividend yield of the S&P 500; to my knowledge this has never happened. Historically, mathematically, financially, etc. this does not make rational sense. However, anyone who has been a human for any length of time knows that in this world things can stay irrational longer than anyone can imagine and investors will still keep buying overpriced investments long into this irrational phase. In 1996 Greenspan famously gave a speech about the irrational exuberance over internet stocks. For three years Greenspan was wrong and then, in March of 2000 he suddenly became woefully right when the dot com bubble popped.

In the past few weeks, bond prices have been falling sharply and one can’t help but wonder if this is not the shaking of the rattlesnake’s tail for a possible collapse in bond prices?

My opinion is that bonds are generally overpriced (particularly treasury bonds), but that the investor’s risk level with bonds has a lot to do with what kinds of bonds they buy. Some types of bonds are so overpriced that investors should get out of them or be prepared for a bumpy ride – certainly in the past few weeks these bonds have shown this vulnerability. On the other hand, other types of bonds show a lot of opportunity and have not gotten as much attention from the general investing public. Investors can still diversify the volatility with bonds, but should be careful about which bonds they choose.

The moral of the story is that if you are in an asset class (such as bonds) that is historically selling for prices well above what would be consider “normal”, and we go through a few weeks where you see those prices drop, it’s probably a good idea to change roads or at least check the pressure in your tires because it’s going to be a bumpy ride once reality hits the proverbial fan.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.

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