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View the article online at http://citywire.co.uk/wealth-manager/article/a650884

Investors brace for Treasury bear market

by James Phillipps on Jan 15, 2013 at 09:34

Investors brace for Treasury bear market

The long vaunted Treasury bear market may already be upon us, with worse to come over the course of the year.

The yield on benchmark 10-year Treasuries moved out to 1.91% last week – the highest level since May last year. The breakout from the trading range of the last five months has been put down to concerns the US Federal Reserve’s commitment to maintaining a loose monetary policy is waning.

The latest set of Federal Open Market Committee (FOMC) minutes from its December meeting revealed an apparent split within the membership. While some advocated the continuation of the asset purchase programme until the end of 2013, others remained in favour without putting a timeframe on the policy.

But others want to either stop buying bonds now or at least end the programme earlier than anticipated.

The minutes said: ‘Several [members] thought that it would probably be appropriate to slow or stop purchases well before the end of 2013, citing concerns about financial stability or the size of the balance sheet. One member viewed any additional purchases as unwarranted.’

Gary Dugan, chief investment officer for Asia and the Middle East at Coutts, said: ‘A bear market has potentially broken out in US government bonds, and our favoured response is to continue to rebalance portfolios towards equities.

‘Investors had been happily buying bonds on the basis that the Federal Reserve’s previous communications suggested no tightening of policy until 2015, by which time unemployment might possibly have fallen below 6.5%. However, the latest Fed minutes seem at odds with the view that interest rates will remain low for a long time to come.’

Dugan believes that although in reality the Fed is likely to keep interest rates low for ‘some considerable time’, other forms of monetary loosening are likely to be withdrawn as the economy and labour market improves.

He points out that when the Fed introduced its more accommodative policy after the summer, the economy was in a far weaker position with job creation averaging 66,000 a month in the second quarter, compared to 158,000 in the second half of the year.

‘Fed communications are clearly in a difficult space and we hope Fed board members will use speeches in the coming weeks to add clarity,’ Dugan said.

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5 comments so far. Why not have your say?

Geoff Downs

Jan 15, 2013 at 14:44

In my view a totally inaccurate report. For me the risk is in equities. Earnings will not support these market levels.

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Alwaysright

Jan 15, 2013 at 17:10

Geoff,

A Treasury bear market is not a risk, it is a certainty. The only question is when. Prudent investors will start to rebalance out of fixed interest before the bear market starts on the basis that, when it does start, it will be catastrophic.

You should also shorten the duration on your fixed interest holdings in order to minimise downside risk.

When interest rates start to rise, gilst and corporate bonds will collapse.

You don't need to be a genius to diversify out of an asset class that is at 100 year highs.

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Geoff Downs

Jan 15, 2013 at 17:25

You are wrong. Interest rates are not going to rise. Do you realise what any rise in interest rates would do to an economy already on the brink.

The collapse of Government bonds and the forecast of inflation has been doing the rounds for a long time. Neither are imminent.

QE has inflated equity prices and the stock market is not supported by fundamentals. That is where you should address your concern.

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Alwaysright

Jan 15, 2013 at 17:44

Wouldn't life be dull if we all agreed!

I take the view that QE will cause inflation (which Governments need to inflate away debt) and that interest rates will rise as a result of market pressures. This need not necessarily be bad for the economy (apart from housing) as many businesses are sitting on substantial cash piles.

We all too easily forget those post recession periods in the past where stock markets have performed outstandingly well during times of rising inflation and interest rates. Anyway, the equity market will predict the real economy's recovery by 12 to 18 months. It always does.

For now, you are probably ok but as the shift to equities gathers pace, it is going to become very hard to get shot of unwanted fixed interest investments at anything like an acceptable price. Holding to maturity will become the only option and, unless you have a pile of cash, you will miss the opportunity to grab the equity bull market.

This is nothing new. I got burnt by it in the 70s, benefitted in the 80s, missed the boat in the 90s etc etc etc

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Geoff Downs

Jan 15, 2013 at 18:04

Of course everyone has their own views.

Firstly Governments have been trying to create inflation for a number of years with QE. It is true there is some commodity inflation, probably caused by financial speculators.

Secondly QE is an attempt to get banks to lend and consumers to borrow. Banks are reluctant to lend and indebted consumers are paying down debt.

Thirdly we are nowhere near through this economic crisis. Debt levels are not being seriously tackled. We face many years of low growth and potential deflation. The idea that this is just another recession that will be gone in twelve months underestimates the seriousness of the problems.

I am absolutely convinced the stock market will tank, sooner rather than later.

Retail investors are now going into this market which is always a sign that the best has already happened.

Anyway on that cheerful note I will sign off.

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