Bonds killed stocks in the last 10 years–but how about the next 10?

Okay, we get it.

This was “The Lost Decade” for stock investors.

Yes, since January 2000 the Standard & Poor’s 500 Stock Index is down, as of December 10, a painful 11%. We know this. We feel it in our portfolios.

But what should we do about it? Read more

Stocks and bonds take away different messsage from the Fed

Bonds and shares of financial companies didn’t like what they heard from the Federal Reserve Wednesday November 4 at 2:15.

Investors and traders in general, on the other hand, were relieved that the Federal Reserve signaled that interest rate policy wasn’t about to change and that any interest rate increase was still a long way off. That’s good news from that perspective because it means that borrowing a weak dollar at a very low interest rate in order to invest in higher returns in overseas markets or in U.S. commodity related stocks is going to stay very lucrative for a while longer yet.

And, of course, in general, lower interest rates are good for stocks since they reduce the attractiveness of investments in asset classes such as bonds or money market funds.

That’s why after selling off in the 10 minutes immediately after the Fed’s announcement, the Dow Jones Industrial Average rallied by 80 points in the next half hour.

Bonds, on the other hand, got slammed and stayed slammed. And as selling spread from bonds to financial shares that ate into the gains in the wider stock market. The Dow Jones Industrials finished the day up just 30 points.

What didn’t the bond market like? Read more

Bad day at the bond auction drives interest rates higher; a sign of things to come?

What if they gave a Treasury bond auction and nobody came?

“Nobody” is highly unlikely but lower demand isn’t. That’s what happened at Thursday’s auction for $12 billion in 30-year Treasury bonds.

With demand lighter than expected yields climbed to 4.009%. Before the auction bond dealers were expecting the bonds to sell with a higher price and hence a lower yield of 3.9943%.

A few hundreds of a percentage point may not seem like much but it’s a huge shift for Treasuries, one of the world’s most liquid investments.

Demand, which had been 2.9 times supply in September’s auction, fell to just  2.3 times supply. The biggest drop in demand came from overseas investors including foreign central banks. In September’s auction overseas investors bought 46.5% of the auction compared with just 34.5% on Thursday.

Who can blame overseas investors for pulling back from the Treasury market? The U.S. dollar continues to drop. Each drop makes a U.S. Treasury worth a little bit less to investors who think and live in euros, renminbi, or won. 

The Dollar Index, which tracks the dollar against basket of currencies,  fell to the lowest level since August 2008 on Thursday.

And the U.S. economy continues to look like one of the world’s weakest with the recovery here lagging all of Asia, parts of Europe, and Brazil and Chile in South America.

I’d need a higher yield too before I bought Treasury bonds against trends like those.

Buyers are snapping up Treasuries–that’s usually not a good sign for stocks

Low yields on U.S. Treasury bills, notes, and bonds are good for stocks. They make bonds look less attractive and stocks relatively more so.

But falling yields that are caused by buyers flocking to Treasuries aren’t a good sign. The decline in yields then is a signal of a falling appetite for risk.

And if the buying is taking place when yields are already extremely low, it’s an especially worrying signal. Buyers are saying that they’ll take almost any yield–in fact, they’ll take almost no yield–in order to play it safe.

That’s what we started to see at the end of last week. Read more