I agree with this. I'm not saying people should be in bonds. But I believe we are fundamentally in a deflationary or disinflation era. After all, what does it tell you when the FED has done radical stuff for a sustained period of time, and inflation is still very tame? In that environment, a 10 yr treasury bond yielding 2% where the principal is virtually guaranteed is not a bad place to be IMO.
quote]Ghost of Igloi wrote:
Yes, that is correct. Again, the point is that in a stock market sell-off funds must find a home, and generally that is in Treasury bonds. Think of it this way, for the average investor they can park money in money market or CDs. For large money managers that is not an option, so the funds flow to the Treasury market.
That said, I am saying this is a hedge. At the start of the last two downturns the 10 Year Treasury stood in the 5% range. So as the Federal Reserve cut interest rates and the stock market declined, Treasury bonds gained from both the drop in interest rates and fund flows. In the current environment we are starting at a 2.15% yield on the 10 Year Treasury Bond so there is markedly less upside via interest rate drops and risk it may move the other direction. Funnily enough the debate among Federal Reserve members is whether or not to raise rates to give the committee ammunition in the future.
Lastly, the vast majority of investors assume that rising interest rates will continue into the future. However, the German 10 Year Bund sits at 0.707% and the Japan 10 Year JGB yield 0.391%. So there is an argument that we are in a deflationary environment and Treasury bond yields will fall.