The Treasury bond market has gone parabolic, and we have seen the beginning of a sell-off in junk bonds.
Even though it took a while longer for longer-duration bonds to follow 10-year Treasury bonds, they did follow. And that has sent the iShares Barclays 20+ Year Treasury Bond ETF (NYSE: TLT) above $106, a new high for 2010.
The reason for this parabola is simple; we have continued to see weakening of economic data in the United States with the Philly Fed survey and initial unemployment claims of 500,000 last seek coming in much weaker than expected. To boot, the Federal Reserve is reinvesting principal repayments of mortgage bonds it has on its books into long-term Treasuries. So if you’re thinking about shorting bonds, remember that the Fed is on the other side of that trade. (Hint: Don’t try it, not yet anyway).
The doomsayers of the U.S. Treasury bond market miss a fundamental point: There is less total credit in the system when compared to 2007. So, such Fed bond purchases is a failing attempt to resuscitate a debt-driven growth cycle that should have never been allowed to get out of hand.
Someday, as this monetary medicine is proven to be unsuccessful and federal deficits get out of hand — because without structural reform this is exactly where we are going — we will have a debt crisis. Bond prices will fall (probably a lot) and gold will soar (likely to $4,000 per ounce or more).
When that day comes, I will be perfectly happy to short TLT with put options, but that day will not be in 2010, and probably not in 2011, given weakening economic data and shrinking bank lending.
In the present environment, an asset allocation of 60% BRIC equities/20% gold bullion/20% zero-coupon bonds makes sense to me.
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