Find out how. Let's Talk

How the Market Works

Broken Record: Long Term Treasury Bonds

Posted by kdadmin on January 28th, 2015.

The Federal Reserve is a broken record. In a good way. Unlike the Swiss National Bank’s surprise move to dump the Euro currency floor ten days ago, the Federal Reserve has been very clear about their plan, about their intentions, and they have stuck to their plan time and again. Over and over. There are no surprises here.

Yet, the domestic stock market seems to need to go through some pointless gyration with each passing, droll comment from the Fed. Today, the market (S&P500) swung 60 points, first up 30 overnight, then down 30 through the trading day. Even though the Fed statement said “Economic activity has been expanding at a solid pace,” which is better than the previous “moderate” pace from last December, traders seemed to need to run for the exits and into BONDS. Have they lost their long term minds?

Have a look at the following chart. Notice the long term treasury bonds (herein represented by the etf TLT). It is at a RECORD high, as in ALL TIME record high. Notice the S&P 500 (represented by the etf SPY). It is still up 12% over the last 12 months. Did you notice how these two lines are, essentially, an inverse of each other right up to January, 2015, at which time TLT shoots disproportionally upward? This is NOT a TLT buying signal. It’s a fear signal.

Tlt vs Spy

Of course, there are those that believe that TLT will go even higher for much longer, but I’m not among them. Here’s why. It’s basic macroeconomics. Have a look at a chart below that reveals how the domestic economy is ACTUALLY working.

  • GDP is trending nicely upward. (orange line)
  • Personal Consumption (PCE) is trending nicely upward. (red line)
  • Unemployment is trending nicely downward. (purple line)
  • The federal funds rate is essentially zero. (navy line)
  • Oil prices are at recent record lows.
  • Inflation is lower than we’d like (core is at 1.61%) but we’re only off our 2007 expansionary market of 2.85% by 1.2%. (green line)
  • The S&P500 is trending nicely upward since the Great Recession. (blue line)
  • The dollar is again a solid currency standard, compared to the global carnage.
  • The shaded area is the Great Recession.

Broken Record

So, you take that altogether and what do you have? The makings of a strong economy, solid corporate earnings, and strong market prices. Does this mean I think that there’s continued room for cost cutting, debt refinancing, consolidation and other ways to truly drive stock prices through the roof? No. But it also doesn’t mean that the market should continue to implode, extending its 80 point drop (or 4%) since the end of 2014.

Earnings season is typically a chaotic time for the market and this quarter is no different. See my previous post, Wicked. But, at the end of the day, the US domestic economy is well positioned, especially given what’s happening in other economies throughout the world.

SO, what does this mean for your portfolios? It means that I’m not buying long term bonds, even though they’re in fashion right now. It means that I’d rather follow a rational investment philosophy, like post-modern portfolio theory, which is based on solid economics, than chase long term bonds when they’re trading at record highs. In fact, I might just lighten my exposure to other bond durations as well.


Minneapolis, MN | St. Croix, USVI
(763) 577-1900