The bull market in bonds isn’t dead – it’s just taking a nap.
So says Gluskin Sheff economist David Rosenberg. Unlike many investment strategists, he views the recent selloff in Treasury bonds not as a sign of an inflationary fixed-income apocalypse, but as the latest opportunity to buy income-generating bonds cheaper.
What’s more, Rosenberg says the current obsession with rising food and energy prices will pass — and along with it the market support for stocks at what he views as bubbly valuations.
“There is a big difference between an inflation scare and an inflation cycle and most pundits are underestimating the degree of austerity that is on its way at all levels of government, which will outlast the commodity boomlet,” he writes Monday in a note to clients.
The yield on the 10-year Treasury note has risen seven straight days, putting it at 3.66% — up from 2.41% at its autumn deflation scare low. That’s a big move in a fairly short time, and it hasn’t escaped notice that the selloff unfurled as investors started asking questions about Ben Bernanke’s intentions and the ever-darkening U.S. budget picture.
Commentators led by Pimco’s Bill Gross have been urging investors to ditch government bonds and find their way into supposedly safer alternatives. Having previously predicted the Treasury market would turn into a “turkey shoot,” Gross recently counseled that it is time for investors to “exorcise” on their bond portfolios.
But Rosenberg isn’t buying any of it. He notes that the 10-year Treasury has had 10 similar spikes in just the past three and a half years, all of which ended with money fleeing stocks and rushing back into bonds — despite the frequent proclamations that bonds were done for after a generation-long run.
“Each time we have the bond bears claiming that the secular bull run is over and each time they have been dead wrong,” Rosenberg writes.
This is not to say he expects the Treasury market to turn around immediately. He says he expects the 10-year yield to test 4% for the first time since last April, when a brief stay above that level was followed in short order by the Greek crisis, the flash crash and a big equity pullback.
Rosenberg has been calling, wrongly as it turns out, for an even deeper stock market pullback since then, contending that the U.S. economic recovery is still far too reliant on government spending and that stock valuations are overstretched. But he says the Treasury selloff could yet turn his spotty stock forecasting record around.
A 4% yield on the 10-year Treasury “seems to be the yield that the equity market tends to respond to and not in a very friendly way,” he writes. “The good news for the stock market investor — we are still 35 basis points away. But at the rate things are going, we may get there by the middle of February.”