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U.S. Treasuries Should Be Bought, Not Sold
Contrary to very popular opinion and in
conjunction with their 30 year bull market, buying U.S. Treasuries could be the
best investment of 2011. Few times in history has an investor been able to
invest with a major trend and simultaneously be a contrarian. When these
opportunities arise, they must not be passed over.
This investment opportunity holds three major
drivers. First, U.S. Treasuries hold the benefit of a safe haven during a stock
market decline and periods of uncertainty; if they naturally resume their
upward trend, any market sell-off could accelerate the upward move. Second,
they remain in a massive 30-year bull market; major bull markets tend to
continue further than expected and well past traditional valuations. Lastly,
buying U.S. Treasuries is a major contrarian play; an overwhelming majority of
analysts and fund managers loathe this asset. Rarely does an investor see an
opportunity with so many factors simultaneously available: the synergy aspect
could be impressive.
This investment view on Treasuries isn’t common.
Often professionals and amateurs alike state the following reasons why a
continuation of low rates and a Treasury bull market are impossible: government
bonds are in a bubble, inflation is just around the corner, the government is a
debt junkie with an out-of-control deficit, and the U.S. dollar is going to
devalue into oblivion. The data these bond bears lean on isn’t necessarily
wrong-they just have the timing incorrect. At some point interest rates will
absolutely rise for a prolonged period. It just won’t be right now. So, I don’t
disagree with the critics-I disagree with their ability to time the trade.
A Safe Haven
Government bonds are traditionally considered a
conservative and safe investment. When the stock market sells off or a crisis
occurs, bond prices will rally as investors seek a safe haven. During the
recent Japanese tsunami crisis, government bonds around the world advanced
quickly. They proved to be a haven during 2008’s financial crisis, during the tech
bubble collapse, after 9/11, and after the 1987 crash, as well.
The United States is smack in the middle of a
secular bear market, although most wouldn’t know it after a spectacular
two-year cyclical rally. When stocks again work their way lower during this
secular bear market, growth investors will be looking for returns, and
conservative investors will be looking for yield and/or a vehicle to preserve
capital. U.S. Treasuries seem to be the most obvious vehicle to satisfy both
types of investor. Treasuries played this role like clockwork during the last
two stock market declines in 2000-2003 and 2007-2009. With yields at almost
4.5%, 30-year Treasuries are actually quite attractive from a yield
perspective, as well.
Using current
earnings, the P/E ratio of the S&P 500 stands in the top 10 percent of all
historical valuations. Poor stock market performance always follows
historically high P/E ratios. Data shows the average 10-year inflation adjusted
return following a top-10% valuation period as an entry point is less than -8%.
At this point in time, stock market investors should certainly expect sub-zero
percent returns over the next decade.
30 year Bull Market
“The trend is your friend until it bends in the
end.” This cliché about markets is dead on. U.S. Treasuries are in a massive
30-year cyclical bull market. Yes, it may be nearing the end of its life; it
just is not quite there yet. The interesting quality of long-duration markets
(either up or down) is that they typically blow right through reasonable
valuations before ending and reversing. Reasonable valuations can help one get
into a market initially but historically will get an investor out of an
investment too early before the market reaches an absurd valuation (like
Facebook.com currently being valued at over $70 billion?). The point is that
relying on fundamental data such as inflation or government deficits at this
late stage of the bond bull market is almost a waste of time in regard to
timing the end of the move.
Even if I’m wrong about fundamental valuations
being useless at the end of a cyclical bull market, it is clearly evident that
there are numerous historical precedents for higher bond prices. Here in the
United States, 10-year government bonds saw a low in yield of about 1.5% in the
1940s, and Japan saw a low for the 10-year JGB at about 1%. The current U.S.
Treasury yield stands at 3.65% and a bond value of about 119. If the U.S.
10-year note falls to a yield of 1%, the bond price will rally to over 140-a
massive 17% rally. To put that trade in perspective, if the MKC Global Fund
assumed a standard conservative position size in the 10-year note and yields
dropped to 1%, our fund as a whole, not just the individual trade, would earn
about 18%.
Contrarian Quality
The most blatant aspect of the bond trade is its
contrarian quality. To say I hold a lonely view is an understatement. I know of
only two major fund managers who prefer to buy U.S. Treasuries instead of
shorting them. For example, recently CNBC hosted one of the many individuals
preaching the idea of shorting U.S. Treasuries. This man is the chief
investment officer for a firm that manages $2 billion, and he was quite vocal
about shorting the asset. Fortunately, there is nothing special about this
since seemingly every day CNBC and Bloomberg interview individuals with
identical views.
Parting company with the crowd is never
comfortable. Luckily, the logistics of a contrarian investment are quite
simple. If the vast, vast majority of market participants hold the same view and
is subsequently on the same side of the trade (in this case own zero government
bonds or short them), any movement in the assets price away from those
participants will result in their sustaining losses and unwinding their
positions. It’s comparable to betting the underdog (that’s actually a superior
team) in sports and receiving points.
Lastly, Bill Gross, who manages Pimco’s $257
billion Total Return Bond Fund, made a bold move by reducing the fund’s
holdings of U.S. Treasuries to zero. He sold them all. That is a dramatic
stance, and the market will punish him for it by running up Treasury prices and
forcing him back into the market at higher prices. He has a slew of
high-profile advisors, including past Federal Reserve members such as Alan
Greenspan. These people help tremendously in determining the fundamental
valuations for U.S. Treasuries. But, as shown earlier, that fundamental
information is useless at this stage, and an advisory board of that caliber can
only be for show.
Bill Gross certainly isn’t alone. Other major
market players who are either short U.S. Treasuries or maintain a negative view
and won’t buy any time soon include: Warren Buffet, Marc Faber, Jim Rogers,
Nassim Taleb, and John Paulson. Again, these are only a handful of individuals,
but they collectively manage more than $300 billion. It is unknown how much
capital Marc Faber, Warren Buffet, and Jim Rogers influence with their
financial views.
Buying U.S. Treasuries
should prove to be a profitable investment. Certainly, nothing is a guarantee,
but the risk reward ratio for this asset is heavily skewed in the proper
direction. Investors face an investment environment where, starved for yield,
they have been forced to speculate in stocks. When stocks begin to decline,
Treasuries will become their asset of choice. The contrarian component of this
opportunity only creates a more exciting scenario for investors, as long as the
masses don’t incorrectly convince them otherwise.
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If ZH ever becomes a "fair and balanced" site, I will leave, along with (many?) others likely, and you'll be stuck with govt shills, trolls, leftist keynesians, etc, as company here.
"Fair and balanced". The leftist banner for "our way".
Excuse me? NO, "fair and balanced" is Fox's tag line. Hardly leftist. In fact, generally the bullshit cheerleaders. Just multiply whatever they say by -1 and you have some idea of what's what
On the article above: any kind of massive rally would imply negative interest rates...therefore you need not consider this advice any further. Neg interest rates (nominal, they're already neg real)... That would be fun to watch.
But, the FED has been buying a lot of treasuries , no? If that is so, and it is, then why are they doing this? Where does the FED, (a private banking cartel) get its funds? So if the FED, a organization that is in control of our nation's money, is allowed to on the one hand buy a nation's treasury notes and on the other hand , charge us interest on money it creates out of thin air , in order to repay itself, money it has lent to us, the american people , then why would anyone want to participate in this insanity? When people around here talk about doom and gloom, it is because they see the system as it is, corrupt and they know, that the emperor has no clothes and never had any to begin with. There are many people who still trust in the system and say to themselves, well , this investment is safe. why do they say this? it is , as they say, america is the safest place to run to, when there is no other place to run and they say to themselves, well , there is no way, that this america will ever end and that the party will continue on, because the FED has the power, (a power that was given to them by our traitorous congress) to print whatever monies or funds it needs to cover our national debts, debts which we now owe to the banking cartel, or so they say. well to that i say this. no fiat currency regime has lasted more than 100 years. that is a fact that cannot be overlooked. robbing peter to pay paul only works for a time and then it dies. right now they are working this system to the end and some suckers refuse to see the light coming at them fast, in the dark tunnel. they will learn the hard way. who knows when the music will stop, but it will stop. the days of playing in the markets are long overwith and the risk inherent there are too great to substantiate playing in that game. how many times have we read about high frequency trading and dark pools, etc etc. the insiders are trying to screw anyone they can before the bottom falls out. some of the rich people i know, have been out of this market for a long time now. their interest do not lie in paper anymore strange as it may seem, their interest lie in PM and physicals. Some of them hear the train coming and are getting ready and attempting to protect themselves. i submit the time of the end is near. you can argue that point that it is not, that is ok. you have your opinion. i have mine. as for me and my house, we prepare for such times that are coming. i remember back in the 50's parents used to buy treasury bonds for their children because they were told it was a good investment. on this very blog a few weeks ago , there was some discussion by certain rating companies that our bonds may well get a rating downgrade in a couple of years. this does not endear a environment of trust .
I hope Tyler was well compensated for this ad.It reminds me of when I read Liar's Poker and learned that your "friend "/broker would sell you bad investments to get them sold for some other friend. Being an honest naive neophyte to investing then, now I am a suspicious ZH reader who LOLed when I read the title. After reading the post I must assume the writer has a lot of treasuries to unload.Keep buying the ad spots, Tyler needs the money.
If we are in deflation, and there is another deleveraging event, then this is correct. But, unfortunately, the money printing is confusing people and PiMCO wants a higher yield in a period of declining total moey supply( FED printing is a drop in the bucket compared to the asset value decline of synthetics, real estate and other BS assets.)
So, can the FED keep yields down?
Is the preservation of capital still more important?
Will real rates crash below administered rates when the economy rolls over again - this time will be bigger.
Right now the FED has successfully cattleherder speculators, savers and hot money into pumping up base asset prices and creating the aura of inflation.
He wants low yields, high bond prices, a bull market, inflation, a crazy risk market, low dollar and low gold and silver. Gee, how long can the control economy last?
And if its all going tits up, he will save the bond market first. See article...
But why the 10Y?
Mark it down on your calendar: 5/17/2011 JGB-40 auction.
But why the 10Y?
Becasue it is more influenced by the Fed's policy rate(s) than the 30-year.
Honestly, who the hell would buy a 10 year note at that rate? You might as well stay in cash.
The Japanese Government Bond ( JGB )
Nobody. You buy it now, and sell it if/when it yields 1%.
get the fuck out of here............
Worst justification for a bad trade idea I have ever read. Have they never considered looking at the risk reward on this investment? ....
The current U.S. Treasury yield stands at 3.65% and a bond value of about 119. If the U.S. 10-year note falls to a yield of 1%, the bond price will rally to over 140-a massive 17% rally. ...
Massive 17%? They were able to write that without laughing coffee through there nose? ( I wasn't able to read it without doing that)
What if we experience a yield rally of 255 bp to a 10y at 6.2%?
This is like when a petulant child pesters a parent about why.... and the parent's only answer is because. Why will yields fall from here? Because.
Not a good reason to own bonds.
Treasurys.
Duration?
comically, mkc global will take the 1 star rating and derisive comments toward the recommendations and justify wisdom by saying a security this hated must be bought since the public is "always" wrong.
You left out the simplest and most persuasive reason: positive carry.
You're putting the lipstick on the wrond end of the pig.
Good luck- and please publish a followup in a year's time. Why not the long bond for good measure?
Get the fuck off ZH troll. Who allowed this article?
This is a ONE STAR based upon the title, alone. Don't even bother reading the damn thing.
...Or insider information.
An apology and argument for fiscal "Co-dependency", and "enabling".
The bottom part of his article got cut off....
Brought to you by the US Treasury and Federal Reserve System.
Base jumping without a parachute would also be a contrarian play. Why introduce pricing risk to USD holdings on a theoretical fear play when nuclear meltdowns, bread riots, European bankruptcies, and a civil war all in the course of three months have failed to produce the fear? If something bigger & badder comes along that is capable of producing fear I would rather have the flexibility of cash. The issue of theoretically capped ROI with ZIRP absent leverage is also troubling when gambling on a SHTF fear/deflation trade.
LOL!!! And I would have monkey's pick my nose first.
Wouldn't trade you a roll of TP for a roll of treasury notes, TP is at least absorbant. Treasury bond I fear would just make a bigger mess of things.
But the end result would be art.
You make some excellent points; the main one being that we're not in Kansas any more. Really, who knows what can happen?
Agreed! The big question is whether a 17% maximum upside on the 10 year is worth the risk of bond market implosion, and the carnage that will unleash. I think Gross, Buffet, Rodgers et al have said - NO. I'm with them
Buy treasuries and you'll be in good company. After all, the Fed is buying them like crazy. They must be a good investment.
When they're finally forced to reduce their balance sheet, they're going to have to flood the market with treasuries.
irony is a misued word, but not in this case. the UST is not a good investment precisely because the Fed is buying it.
so, what exactly is the upside with UST? it is not possible for the yields to get much lower. what about that downside? credit risk + inflation.
the only sensible "contrarian" play in UST is staying away from them entirely.
Love the post, though I disagree. Dread the abuse you're going to get.
BTW-- Bill Gross is in cash because the only fixed income with any upside potential is IG. Everything else has only downside. He doesn't even like IG apparently.
It's about fair value, which Treasuries are not.
Only a FOOL would buy treasuries at these low rates... unless you are a TBTF bank member of the Federal Reserve where you can flip them within a week or two and get full face value in such a short period of time (and in that case you are not really buying treasuring, you are being a middleman for the Fed and getting profit in a very short period of time). Normal and small investors are best to avoid treasuries as you will lose value/money.
Everyone who is a normal investor knows that inflation alone would more than eat up any such hope for 'profit'. As for safe haven, every major central bank holds gold as a safe haven and Sir Evelyn Rothschild even says that if you are safety conscience you hold on to you physical gold bars. If physical gold is good enough for one of the world's most wealthy and longstanding investment and financing families in the history of the world, it is more than 'good enough;' for any smart investor looking for a safe haven from devaluating currencies.
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"In the absence of a gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good and thereafter decline to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as claims on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to be able to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
The above was said by Alan Greenspan, 'Gold and Economic Freedom' in 1966.
Hmmm.. maybe the Treasuries are the new Citi shares.
oh shut up
yes quite agree and Marilyn Monroe should be resuscitated permanently also.
when the country is run on honesty or capitalism....... thats when I may buy.
And both would pass the smell test equally well. Thank you Tyler for the occasional post that makes us look at both sides of the arguement especially when we are on the side of the masses.
I've passed gas that smells better than this one:
"buying U.S. Treasuries is a major contrarian play; an overwhelming majority of analysts and fund managers loathe this asset."
Right. Everyone loathes Treasury paper; that's why record amounts of debt are sold at every T-auction with a bid-to-tender around 3. You know everyone loathes an asset that "remains in a massive 30-year bull market".
The only reason bonds remain in a bull market, with pathetically inadequate yields, is that the Fed is buying most of them. If the Fed is the only entity willing to take on these turds, I definitely don't want them.
My guess is MKC Global wants you to buy a truckload of Treasurys--from THEM.
safe haven, bitchez...........
dup.
I honestly do not know if anything is safe anymore. Maybe a bunch of canned food and nice bottles of alcohol.