Tuesday, April 17, 2012

Bonds Remain the Contrarian Play

The world is very bearish on bonds.  It is hard to make a case for value in the bond market.  Our only concern is this bearishness is well understood and has been priced into the market for a while now.  The long bond has had a 34% total return in the last 12 months versus a 5.1% return for the S&P 500 over the same period. The bond market has also outperformed stocks over the last 30 years for the first time since the Civil War.
At some point the bond bears are going to be right. But after a decade of crying wolf, it is hard to listen to these calls.”

Read it at The Big Picture
More Bond Haters
By James Bianco

Anyone who has taken a class in finance will tell you that the stock market has to outperform bonds over the long-term to make up for the higher risk being taken. But how long is the long-term? Recent history shows that it must be longer than 30 years, which is probably longer than the time horizon of most investors. The following chart shows the portfolio allocation of investors in the AAII Survey (h/t PRAGMATIC CAPITALISM):

Despite the extreme outperformance of bonds during this period, allocations have remained relatively constant with a nearly 40% current differential between stocks and bonds. The current bearishness noted in the article has existed over this entire period and certainly should be well priced in by now.

The lingering fear for bond investors is whether inflation will push higher in the coming months and years. As Steve Randy Waldman highlights in the previous post, Depression is a choice, our current political choice clearly favors creditors and a low-inflation environment. Based on this view of political actions and the remaining over-indebtedness of households, I continue to believe that fears of higher inflation are also misplaced. In this light, long-term Treasury bonds will likely continue to provide returns competitive with stocks for the next few years.

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