To Thornburg’s Brady, the outlook is so dire that Fed policy makers may need to reverse course and add more stimulus, benefiting bonds.
“Ultimately, they’re going to feel like they need to do more,” he said. “A month ago everybody was like ‘the U.S. economy is fabulous, everything’s wonderful, this is awesome, we like everything.’ Here we are one month later and everyone’s all concerned.”
Gone Bearish
One long-time bond bull recently turned bearish, and he sees no reason to change course. Yields will reverse and end the year at 3.5 percent to 3.75 percent as the economy improves, according to David Rosenberg, the chief economist at Gluskin Sheff & Associates.
“The economy is on a moderate accelerating trend,” Rosenberg said during a telephone interview Jan. 28 from Toronto. “We’re coming out of a flight to quality on emerging markets. This is a blip rather than a long-term trend. The yield decline is temporary.”
Gross domestic product expanded an annualized 3.2 percent in the final three months of 2013, according to the Commerce Department on Jan. 30. That matched the median estimate of 72 economists in a Bloomberg News survey. GDP expanded 4.1 percent in the third quarter, the most in almost two years.
Even though U.S. yields have fallen, they’re still higher relative to bonds from other major global economies, making them attractive on a relative basis.
The extra yield investors get for holding 10-year U.S. notes instead of similar maturity German bunds reached 1.11 percentage points on Jan. 22, the most since July 2006 based on closing prices.
Beating Stocks
“On a cross-market basis, Treasuries are by far the best market,” said Vimal Gor, who oversees A$15 billion as the Sydney-based head of income and fixed interest at BT Investment Management Ltd. Gor said he’s betting on gains in five-year U.S. Treasuries.