There’s been a feeling on Wall Street since the beginning of the year that stocks are the only game in town. ‘Interest rates are too low making bonds too risky; the commodity bull market is over; emerging markets look like hell, etc. so we HAVE TO buy stocks.’
Regular readers already know how I feel about this. They also know that I see this kind of herd mentality as an opportunity.
One question I like to ask myself regularly is, ‘what is the most hated asset class right now?’ And my answer today has to be long bonds.
The smart money, on the other hand, is happy to take advantage of the recent selloff as a buying opportunity. Bond guru, Jeff Gundlach, recently said he thinks recent long-term interest rate levels will mark the high for the year.
The charts suggest he may well be right. The yield on the 10-year Treasury Bond rose to meet former support/now important resistance around the 2.3% level before reversing last week. The pattern over the past few months looks to be a bearish flag that has merely relieved the prior oversold levels:
Meanwhile, the long-term treasury ETF briefly broke down to new lows before reversing higher possibly whipsawing the bears:
Looking at the fundamentals, the economy has been slowing over the past few months and there are zero signs of inflation. If the economy continues on this course the Fed will be forced to extend their bond purchases indefinitely.
And speaking of smart money and zeros, Warren Buffett typically like to buy long-term zero coupon bonds when the economy hints of recession. I wonder if he’s used this opportunity to do so.
Disclosure: I own TLT for myself and for investment management clients.