Bonds Predict the New Normal

The bond market is predicting PIMCO’s New Normal environment: slow growth, little inflation. The bond funds are signaling no confidence in the direction of US fiscal policy.

Inflation is not the issue. The inflation-adjusted TIPS are showing very low real yields, close to real LIBOR.

A strong recovery is not the issue. This chart from Bloomberg as analyzed by Calafia Beach Pundit shows the current yield curve in red, and Boomberg’s forward projections in purple (one year out), yellow (two years) and green (five years). The projection shows the Fed raising the Fed Funds rate to 1% in one year and 2.25% in two years on its way to 4.5%. These future curves show little to get excited about; real growth would drive the long end more steeply.

The US deficits are the issue. The risk for bond investors is a rise in the longer rates due to the need to finance the huge deficits. After a flurry of poor auctions following the ObamaCare bill passing, the Treasury markets have settled down, at least for the moment. Yet this may be a calm before the storm.

When gold rises, it is usually looked at as an inflation indicator, but that is too simplistic; it is really a hedge against bad government. The bond market also can indicate a lack of confidence in government – just watch Greek bonds right now. The major bond funds in the US are voting against Obama by becoming seriously underweight in Treasuries:

  • PIMCO has dropped in to 27.5% and shortened durations
  • Templeton owns no Treasuries in its Global Return Fund
  • Wellington has only 13.5% whereas a typical bond fund would be well over 50%

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About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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