The Treasury bond market looks a whole lot different today than it did two months ago. It’ll probably look a whole lot different one month from now, too.
T-bonds are supposed to be safe. They’re the favored investment of widows and orphans, pension funds, and folks who just don’t want to deal with the day-to-day volatility of the stock market.
But, for the past year, the action in Treasury bonds has made the action in the stock market look quite tame.
The iShares 20+ Year Treasury Bond ETF (TLT) – which tracks the action in long-term T-bonds – lost about 10% during the first 10 months of 2018. It wasn’t a straight, steady drop. Lots of several-week-long rallies interrupted a string of several-week-long declines. And, by the time Halloween rolled around, widows and orphans were 10% poorer.
That’s a big decline for a supposed “safe-haven” asset.
The decline made sense, though. The Federal Reserve has been hiking interest rates, the U.S. economy was running along at a solid pace (increasing the chances for more Fed rate hikes), and foreign buyers of T-bonds – like China and Japan – were cutting back on their purchases, and the potential for trillion-dollar government budget deficits meant the U.S. Treasury would have to issue record amounts of new debt.
Heck, given all of these conditions, it’s surprising TLT lost only 10% in 10 months.
Treasury bonds have put on one of the biggest rallies the bond market has ever seen. TLT is up 9% since Halloween. It has just about recovered everything it lost earlier in 2018 – in just two months. Take a look…
The rally is curious because all of the bearish conditions for Treasury bonds that existed two months ago are still in place today. So… what changed?
In a word… fear.
The S&P 500 fell about 20% from its high in October to its low on Christmas Eve. Investors got spooked. They sold off their stocks and bought Treasury bonds with the proceeds. And, if stocks remain weak in 2019, then T-bonds will probably have a pretty good year.
But, in the short term, the recent T-bond rally is probably over.
As I mentioned last week, the stock market is oversold enough to fuel a short-term rally that lasts through the end of January. That’s going to limit the money flow into the Treasury bond market.
We may not see a mass exodus out of bonds and into stocks. So, I wouldn’t be too quick to bet on a big decline in TLT. But, I certainly wouldn’t bet on a much larger rally from here.
Best regards and good trading,
In today’s mailbag, a word of caution from one subscriber about a coming bear market…
Thanks for the excellent insight into the overall market outlook. I know I’ll be following it pretty closely. I’ve been more bearish now than ever. I usually favor a bullish stance… but not now. This market is definitely acting like what you’ve described over the years as a bear market. So… I’m acting accordingly and doing pretty good, considering the ugliness out there.
I’ve trimmed back most of my long positions and am only long in a short-term trading situation. The two long positions I’ve held onto since October, I’m selling call options against. These two stocks are secular, in nature, and should hold up well during the running of the bears.
So you naysayers out there be cautious and pay attention to what Jeff is saying and you should come out okay during this bear run. Use his analysis to guide your buying and selling so you don’t get hurt out there. That’s my best advice. I know you weren’t looking for it anyway. But maybe it may help, and it was free! Thanks again, Jeff, for all you do.
And the responses to Jeff’s New Year’s Eve Market Minute essay keep pouring in…
Thank you for sending this email. It should mean more to your readers than any tip or market insight you could provide. I know it touched my heart. Thank you!!
That is the most beautiful bit of advice I have ever received from a financial guru… Better than Charles Dickens!
Thanks, Jeff. That is a beautiful message that I will not forget and it’s well timed for our current market conditions. My best to you and your family.
This is the best essay Jeff Clark has written all during 2018. A great reminder.
Great comments and very timely. I invest with you, not because you’re smart (you are), but you find ways to constantly remind us of the more important things in life. Looking forward to an exciting 2019!
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