Longer-term treasury rates might be too high and bonds could be cheap.
There, I said it!
With everyone calling for rates to go much higher after the Fed begins to reduce QE in September, we think they may go lower. We believe the growing herd of bond bear calls may be shortsighted.
Leaving aside the discussion about the Fed tapering process, history has demonstrated that rates have sunk to much lower levels in countries that have sustained slow growth due to structural issues such as too much debt. Look at the Japanese experience. We share their problem, as does Europe, so we would not be surprised to see bonds stabilizing and rising in coming quarters.
We find it comical when we hear talk of a strong economy. We will stick to one fact, and one fact alone: over 70% of the jobs created this year have been part-time. Who in their right mind can take the Fed and pundits seriously when they hold out strength in the labor market as a reason to reduce the pace of QE? A preponderance of part-time jobs is not a sign of job market strength.
Of course, we would still love to see the Fed stop because QE it is a “bad drug” that has become an addiction for the markets. Corporate earnings are plateauing, yet equity markets race to put a higher multiple on those earnings because of QE, leading to a dangerous environment.
The broad equity markets remain priced at levels that typically have marked major tops, but we are not naïve enough to think we know when a meaningful correction might occur. Such a downturn will likely not be pleasant because margin debt remains at historic extremes.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.