It was interesting over the last couple of days to watch a series of both hosts and analysts scratching their heads and fumbling for answers over the recent decline in interest rates. After all, how could this be with inflation creeping up due to much stronger economic growth? More importantly, asset prices are clearly telling investors to get out of bonds as the “great rotation” is upon us as we launch into this new secular bull market, right? IF they asked me, here would be my answers to their questions. First, a little history.
In June of last year, as interest rates were spiking, there were many calls stating that the“great bond bull market was dead.” Those calls even included the great Bill Gross. The idea of the “great rotation” was born and spread through the media and the financial industry like wildfire. However, at that time I wrote an article entitled: “5 Reasons To Buy Bonds Now” stating:
“For all of these reasons I am bullish on the bond market through the end of this year.
However, the catalysts needed to create the type of economic growth required to drive interest rates substantially higher, as we saw previous to the 1980’s, are simply not available currently. While there is certainly not a tremendous amount of downside left for interest rates to fall in the current environment – there is also not a tremendous amount of room for them to rise until they begin to negatively impact consumption, housing and investment. It is likely that we will remain trapped within the current trading range for quite a while longer as the economy continues to ‘muddle’ along.”
Of course, since then housing has rolled over, growth of consumption has slowed, and economic growth has remained quite anemic with first quarter growth coming in at a negative 1% annualized rate.
But despite the evidence, mainstream analysis continued to err to the side of flawed analysis. I have continued to revisit this issue over the last several months reiterating my belief that interest rates remain “trapped” at lower levels due to an inability for the economy to absorb higher borrowing costs.
Reiterating Bond “Buy” – 35 Years Of History Confirms
“Bonds are currently exhibiting some of the best valuations that we have seen in the last couple of years with the technical indicators stretched to extremes. Exactly the opposite is true with the stock market with valuations (based on trailing reported earnings – the only true measure of valuations) pushing levels normally associated with bull market peaks, prices at extreme extensions and earnings peaking.  This is the time when investors should be thinking about taking some profits by ‘selling stocks high’ and adding some relative safety by ‘buying bonds low.’ After all – it is what we are supposed to be doing as long term investors.”
