US Treasuries Befuddle All the Experts

The S&P500 closed the week down a small fraction of one percent. Volume was very light and volatility approached the lows of the year. The S&P seems to be having a hard time breaking out and beyond the upper 1800’s, a level first reached in January and then again throughout the spring.

Momentum seems to be fading. MACD continues to diverge bearishly from the price level in the S&P (ie. prices are back to the old highs, but MACD is far lower). And while prices last week dipped  below the 50 day moving average, they did close above; this suggests that as a trader, one should still stay somewhat bullish and certainly not be heavily short. Prices are still well above the 200 day moving average and this average is still sloping upward. So upward momentum is weakening ,but the overall trend in prices is still up.

On the economic front, the news was fairly poor. Retail sales missed badly….both the headline number as well as the figure excluding auto sales. It appears that American consumers are running out of gas. The housing market index missed badly. Yes the housing market has rebounded somewhat over the last two years,  but this rebound is now showing signs of slowing down. Both consumer and producer prices were higher than expected when looking at the core figures; headline inflation, however, still remains firmly under control. Industrial production missed badly, as did consumer sentiment, which registered its biggest miss in eight years! On the positive side, the Empire State manufacturing survey and the initial jobless claims were better than expected.

Back in September 2013, we noted—in an entry titled US Treasuries on Sale?—that the 10 year Treasury had risen in yield (fallen in price) from 1.4% to about 3.0% and we suggested that this asset class might present a good opportunity in terms of value, and especially when many other asset classes seemed to be overpriced (ie. not offering a good value).

So how did we do?

Well last week, the 10 year touched 2.47% or well down form 3.0%. In the Treasury market, this represents a huge rise is price over a relatively short period of time.

In short, we were right.

But more importantly, we were right when virtually all of the Wall Street pundits were wrong. Almost all economists on Wall Street (yes, almost 100%) were forecasting that rates would rise over this period. In fact, the experts were so wrong, the Wall Street Journal recently published a big piece titled: “Stubborn Treasury-Bond Yields Touch a Low”.

In it, the author notes:

US government bond yields, which move inversely to prices, briefly touched their lowest level in six months Monday as geopolitical fears combined with uncertainty over global economic growth to push fund managers toward havens. The surprise strength in Treasurys is confounding bond-market bears: in 2014, US government bonds have gained more than the Dow Jones Industrial Average.

So what’s an important takeaway? The fact that all the experts can (and often are) wrong about such an important topic—in this case interest rates.

So when Wall Street insists that no recessions are on the horizon and stock prices will not meaningfully correct, please take note—these so-called experts are often wrong, and when they’re wrong, they’re wrong in a big way.

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