Still alive and kicking

Last year a number of analysts sounded the death knell for the bond market. The chorus grew louder in mid-December when the Federal Reserve announced it would begin scaling back its stimulus program in January. Prevailing wisdom said that since the Fed’s $85 billion monthly bond-buying program has kept interest rates artificially low, bonds would soon come under downside pressure given the inverse relationship between interest rates and bond prices. Funny, someone forgot to tell the bond market.

Take a look at the year-to-date charts above representing US bonds, US high yield bonds, US municipal bonds and (for good measure) international bonds. My proxies for these markets are  iShares Core Total US Bond Market ETF (AGG), iShares iBoxx $ High Yield Corporate Bd (HYG), iShares National AMT-Free Muni Bond (MUB) and SPDR Barclays International Treasury Bd (BWX).  Through February 27 these exchange-traded funds have increased 2.0%, 2.6%, 3.4% and 2.3%, respectively, and are up 3.0%, 7.7%, 6.5% and 3.8% over the past six months.

I don’t disagree that the 32-year old bull market in Treasury bonds is long in tooth. Looking back at 200 years of data on interest rates in the US, bond bull markets historically run 22-37 years. But I also know from studying the past that bond markets roll over very slowly – it can take 2 to 14 years to change trend. Bottom line: Low rates can last for a long time. Take the guesswork out of the investment process and let charts guide your decisions. My newsletter provides intermediate-trend buy and sell signals for the bond markets shown above.

♦ Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog. 

One of these bond markets is not like the other

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click to enlarge

Back in 1981, the year I graduated from high school, the yield on 10-year Treasuries topped out at 15.8%. My entire adult life has consisted of a roaring bull market in bonds with steadily falling yields and rising prices. I’m now paying very close attention to what’s happening in the bond market and here’s why: Over the past 223 years of US interest rate history we know that bond bull markets tend to last between 22 and 37 years and the interest rate on the US 10-year Treasury note averages around 6%. The current bull market is now 32 years old and the 10-year note is yielding 1.9%. US bonds seem to be at a generational tipping point. However, a study of past bond cycles also tells us that rates can stay low for years before heading higher. Japan is a good example: In 1996 policymakers cut rates to near-zero and today that country’s interest rates are still under 1% – 17 years later.

I track three categories of US bond funds each market day for my newsletter and managed account program: taxable bonds, municipal bonds and high-yielding bonds. Taking a look at my six-month chart, you can see how taxable bonds [my proxy: iShares Core Total US Bond Market (AGG)] and municipal bonds [my proxy: iShares S&P National AMT-Free Muni Bond (MUB)] are languishing. High yield bond funds [my proxy: iShares iBoxx $ High Yield Corporate Bd (HYG)], however, have climbed nearly 8.5%. That’s quite a divergence.

High yield bonds are performing relatively well now and when the tide turns against the bond market, they should continue to stand-out because unlike traditional bonds, high yield bonds aren’t terribly sensitive to rising interest rates. In fact, they can at times be negatively correlated to rising rates because when interest rates increase, it’s signalling a pickup in economic activity which can be beneficial to the companies who issued the high yield debt. Investment banker Barclays recently published fresh analysis on this subject which confirms that a rising rate environment poses relatively little threat to high yield bonds. Their study showed that high yield bonds avoided negative returns in 12 of 13 periods of rate increases.  In other words, US high yield bonds march to the beat of their own drummer.

For now, my readings: US Bonds – Bearish, US Municipal Bonds – Bearish,  US High Yield Bonds – Bullish.

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Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.

Muni musings

It’s been more than two years since analyst Meredith Whitney sounded the alarm bells with her bold December 2010 appearance on “60 Minutes” calling for an imminent muni bond market meltdown. In the ensuing 27 months my proxy for the muni bond market, S&P National AMT-Free Municipal Bond (MUB) – a $3.6 billion exchange-traded fund, has appreciated at an annualized rate of 7.9%. Recently, though, muni prices have softened. MUB fell below its long-term 200 day average in early March and I’m hearing rumblings on Wall Street that the muni bond market’s bull run is coming to a close.

MUB topped out right after Thanksgiving and fell sharply heading into year-end as concerns mounted that Congress would eliminate the tax exempt status for muni bonds as part of the Fiscal Cliff negotiations. That didn’t happen, but munis have struggled to regain their footing since then. A recent spate of credit downgrades from the likes of  the State of Illinois and Stockton, California’s bankruptcy have undermined investor confidence. March also happens to be an historically lousy month for munis.

From a technical point of view, MUB is currently consolidating. Price is above both its intermediate-term 50 day average and longer-term 200 day average and has formed a triangle pattern. Whichever direction, up or down, MUB’s price breaks out from this triangle pattern has a high probability of pointing the way of the muni bond market’s next big move. My own strategy for measuring risk focuses on intermediate trends and turned bullish on April 5, so odds favor an upside move.

For now, my US Municipal Bond reading: Bull market.

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Please note that my readings will change without notice,  so please don’t buy or sell solely based on anything you read in this blog.