The Financial Times Bond markets: A false sense of security
Investors seek perceived refuge in bonds but fears are rising that their faith has been ill-placed
The demons afflicting market sentiment could be described as the “three FCs”. Tormented by the financial crisis, flash crashes and the impending fiscal cliff, investors have turned to the time-honoured refuge of bonds.  But savers who have stocked up on bonds with record low yields face danger on two fronts: on the one hand, their income could be eroded by inflation, while on the other, the value of their holdings could fall sharply when interest rates do start to rise.


Whenever we see stories warning of the risks in bonds, as if the subject has never been discussed, we want to remind everyone that this is the only thing that has been said about the bond market for many years.  And, it has been wrong for many years.   Here is what we wrote last month:

Larry Fink hates bonds. Warren Buffett hates bonds. Guggenheim Partners hates bonds. Jeremy Siegel has hated bonds since the early years of the Clinton administration (1994). Nassim Taleb thinks every human on the planet should be short bonds. Leon Cooperman wouldn’t be caught dead owning bonds. Michael Steinhardt and Dan Fuss have also bad mouthed bonds. BofA says the 30 year old bull market in bonds is over.

These predictions all range from several months to several years old.  10-year yields have not cooperated with these sages as rates continue to stay low.  Why?  Maybe because these predictions are solidly a consensus opinion and consensus opinions rarely play out exactly as expected.

The table below shows the monthly survey of economists as conducted by Bloomberg.  In the history of finance we cannot find a more one-sided opinion about a freely traded double-auction market. Witness:

• 116 months of surveys have been completed since December 2002.
• 112 of 116 (97%) of these surveys predict higher yields.
• 37 of 116 (32%) show more than 80% of economists predicted higher yields, including the last survey (November 2012).
• On three different occasions, 100% of economists predicted higher rates. The last occurrence was May 2012 when the 10-year yield was predicted to reach 2.40% over the next 6 months. This means the the 10-year yield has to rise 60 basis points this week to make this unanimous opinion correct. Don’t hold your breath.
• On the flip side, only four 4 of 116 (3%) surveys predicted lower rates, shown in red below. The last occurrence was December 2010 when 10-year yields were 150 basis points higher at 3.20%. The 10-year fell from 3.20% in January 2011 to 1.37% earlier this year without any of the surveys during the period predicting bullishness.

The world has been very bearish on bonds for years and has been very wrong. It is hard to make a case for value in the bond market when the Federal Reserve is pushing rates lower via QE. That said, this bearishness is so well understood that it has been priced into the bond market for a while now (years). We would argue this is why the constant drum-beat of bond bearishness has not been working as the bears have already placed their bets.

At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls.



Source: Bianco Research

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

9 Responses to “Shocking News … Bond Bearishness!”

  1. Conan says:

    Look at Gary Shilling and his Deflationary explanation for Bonds performance:

    There are some interesting comments on Earnings and Home prices also. Remember he said this in like March of this year.

  2. fmatthew5876 says:

    If bonds are so terrible, where does the passive retirement investor go if they want to reduce their equity exposure?

  3. Greg0658 says:

    then my duoNova fix is > stock certificates must pay inflation rate + 1% on OPM by law no exceptions .. CEO pay to match performance after that .. how a corp gets to that metric ? jobs overseas – pays labor nothing – is the game between stocks and bonds

  4. Greg0658 says:

    I should have said > ‘at least’ +1% on other peoples money

  5. Mr.-Vix-It says:

    Most of these guys are old fogies and probably won’t be around when yields finally do go up. The issue is the time horizon these sages are talking about as well as this poll. If you were to rephrase the question and ask “Will the 10 year yield average above or below 2% for the next 30 years?”, I would be shocked if 100% didn’t say above 2%. It would be foolish to think that yields could remain permanently below 2% on average. Could the 10 year hang below 2% for another decade? Sure it’s possible but the average won’t hang below 2% for the next 30 years. For a truly long term investor (there are still some out here!) which may or may not be who these sages were advising, it makes absolutely zero sense to buy bonds if you will be cashing out in 30 years.

  6. [...] Big Picture: More people acting like the bond market bear call is new – Whenever we see stories warning of the risks in bonds, as if the subject has never been [...]

  7. Greg0658 says:

    ‘ it makes absolutely zero sense to buy bonds if you will be cashing out in 30 years. ‘ **

    a bit more than zero sense – see the statement:
    “People should be more concerned with the return of their principal than the return on their principal.” — Will Rogers

    another point is the weeding out in the precious DOW30 or S&P500 thru the years as a MSM talk’g point for the 5′oclock .. winners & loosers makes a market

    never did I think my precious Kodak would disappear in my lifetime .. quite a few memories and a broken brick of various ASAs* in the freez with some chem packs in the darkro- aka storage room

    * ISOs to you kiddos

    ** no pick’g a fight because I know I know where your coming from

  8. Mr.-Vix-It says:

    Greg0658, people who buy U.S. bonds are the people who are more concerned with the return of their principal since it is generally considered as the asset with the least risk. This is exactly why they should be concerned with this investment choice if they have bonds in their 401(k) and plan on retiring in 30 years. People in their 20′s and 30′s are buying bonds and ignoring stocks completely which is exactly the opposite of what they should be doing. At some point in their future, this demographic will experience a secular bull market in equities and a secular bear market in bonds. People always seem to forget the cyclicality of it all and I don’t understand why. Everything in this universe is a repetitive cycle: the tides, menstruating, waking up, going to sleep, bonds, equities, etc.

  9. [...] everyone knows is often incorrect. One example of this was pointed out by Bianco Research in their November 21 blog post: Experts have been notoriously bearish (predicting higher yields) about the bond market for many [...]