North American bond yields have broken higher over the past couple of weeks. Some suggest bond traders have been selling, disappointed that last week, at the March meeting, the Fed did not indicate another round of bond buying to follow when Operation Twist ends this June. The caveat there is that although the Fed says it has been using QE’s to buy bonds to lower rates for borrowers, in fact (as we can see in the chart of the US 10 year yield below) each time the Fed did implement a fresh phase of buying, yields actually spiked higher not lower as more QE increased hopes for economic growth and prospects for inflation. So the recent spike in yields on no new QE announcements seems counter to recent experience. (Perhaps some are selling now in light of Bill Gross’s tweet last week to expect more QE announcements in April). Or do markets believe the Fed’s assurances that the economy is looking stronger and does not need more QE? Maybe. (Although the Fed’s assurances on the economy have been dangerous and repeatedly wrong.)
The unseasonably warm winter has doubtless made some coincident economic data improve over the past few months (after seasonal adjustments that assume cold weather) and this has led some to believe that the US economy is on the rebound again. On this logic, believers may be shifting capital out of bonds and into equities. This may be, although buying volume into equities has been vapid at best. The institutional preference to hold cash continues.
Indeed we saw a very similar counter-trend rally in rates in both the first quarter of 2010 and 2011 (see below) before falling to fresh lows. At this point, there is no way to tell how long the current bond sell-off will last, but if our analysis (and others we respect, like the ECRI) are correct in seeing evidence of a fresh economic downturn in the offing (once seasonal adjustments fall off) then we may well find the Spring of 2012 presents yet another buying opportunity for bonds while stocks set up for their next leg of disappointment. Time will soon tell.
Source: Cory Venable, CMT, Venable Park Investment Counsel Inc.