Peak Theories Research LLC
The Weekly Peak
December 10, 2010
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The first – economic growth – is likely to drive investors toward equities and out of bonds since stocks should perform better than bonds during atime of economic expansion.The second – unsustainable fiscal policy – is likely to drive investors toward precious metals and other physical and transferrable stores of intrinsicvalue and out of bonds that will suffer from such policy.The third –
– is related to that unsustainable fiscal policy and will be the
most powerful force
of these three, in my view, to
driveinvestors out of bonds
since rising rates will cause the value of bonds to decline while curbing the value of interest received.The second source to bring about two of the aforementioned factors, in my view, was Fed Chairman Ben Bernanke’s recent
interview.For in that interview, Mr. Bernanke hinted at the idea that the Fed’s current round of quantitative easing to help stimulate the economy could bealtered – as in expanded – as needed.In the past, this communication may have been received by bond investors with cheer since the possibility would exist for a steady stream of thegovernment’s support for the Treasury market. In fact, this may have been the initial reaction out of investors with the 10-year’s yield dropping to2.95% on Monday from 3.03% on Friday but with this yield as high as 3.33% on Wednesday, investors seemed to have gotten sick from thepotential for an ongoing QE Drip. Sick because Mr. Bernanke committed to nothing specific about such bond purchases while intimating that theFed could be a constant inflationary force on the markets for some time to come.Mr. Bernanke may be “100% confident” that he and his team could tame inflation quickly by raising rates but that view does not seem to be sharedby ixed income investors and perhaps the early bond vigilantes.While most of the analysis I have read has attached this week’s spike in yield to growth expectations for the economy, this would seem moreplausible if stocks had rallied significantly.
If investors really thought the tax deal was going to juice the economy
it would be showing up in the equity markets and not the dollar
.And perhaps it will show up in the equity markets over time and I tend to think it has been over recent months – last week in particular perhaps –and will continue to slowly, but if the particulars related to the tax compromise were likely to bring such growth to the economy in 2011, it seemsto me it would have deserved at least a 1% rally after the fact and especially in light of the steep decline seen in Treasurys.It is for this reason that I think much of this week’s sell-off has more to do with investors signaling to the Fed that as a collective the fixed incomemarkets will not tolerate the Fed Chairman’s continued puppeteering especially when his proposed actions could bring about inflation that cannotbe tamed overnight. Put otherwise, I think
this week’s decline in Treasurys signals some loss of confidence in Ben Bernanke’s Federal Reserve
.Putting aside any early action out of the bond vigilantes, however, and returning to the idea that increased economic expectations might support abust in the bond markets, I think we’re looking at a slow dynamic rather than a dramatic sell-off of bonds as was seen earlier this week.Rather, I believe investors will assess – cautiously – that the economic recovery is, in fact, underway and creep from the safety of bonds for thehigher returns offered by other investment classes such as equities and commodities.And while this unwind is likely to be slow, it’s very much underway as the previous charts of an investment grade bond ETF show us.