Since April 1, the total U.S. stock market, as measured by the Wilshire 5000, has returned 8.9%. That's good enough for most investors, but long-term Treasurys have produced an even more impressive 11.9% total return.
Canadian contrarian David Rosenberg isn't surprised. He has been one of the few market strategist advocating that investors seriously consider long-term Treasury bonds for at least the last five years. While the prospect of locking in anemic returns of 1% to 2% for 30 years looks downright depressing to many people—and very risky to bond market professionals—Rosenberg has been mostly right.
He also hasn’t been completely alone. Leading-edge economists like Lacy Hunt of Hoisington Investment Management and former Merrill Lynch chief economist Gary Shilling have made compelling cases for long-term government bonds in a world of aging demographics. And College Station, Texas-based investment advisor Janet Briaud has delivered stellar returns for her clients in these securities.
Yesterday morning the Toronto-based economist and market strategist penned a piece dubbed "Bonds Have More Fun" that detailed his thesis. It suggested that the reopening boom might be short-lived and that the economy was about to slow down and return to the mediocre pace of growth experienced in the last decade.
Some of the statistics he cited might make skeptics of the bond market rally think twice. Rosenberg noted that yields on 10-year Treasurys have been falling since late March and are now down 0.5% since then.
When yields on a benchmark security like the 10-year Treasury fall for eight out of nine weeks, “I call that a trend,” Rosenberg remarked. The skeptics, he added, call it a "technical" move.
“For these folks, moves in equities are never ‘technical,’ unless the prices go down, of course,” Rosenberg continued. “When the S&P 500 breaks out, it is always about the wonderful macro backdrop and flush liquidity conditions.”
One might think stock market bulls would appreciate a bond market rally, since yields on equities become relatively more attractive. But as Rosenberg writes, a drop in bond yields signals economic weakness and stock market bulls chalk them up to “technical,” or “short-covering” or “repositioning.” Some also think U.S. Treasurys are relatively attractive to Japanese and European investors whose government bonds offer even more paltry payouts.
For his part, Rosenberg thinks the current inflation bulge is “easily explainable, narrowly based and seeming to be very temporary.” It could continue for several more months.
But that’s about it, in his view. A recent University of Michigan survey finds that spending intentions on autos and housing are at their 40-year lows.
The coming slowdown in economic growth and inflation is already showing up in other forward-looking indicators, Rosenberg maintains. The widely-watched Atlanta Fed Nowcast GDP growth model for the second quarter is “down to a 7.5% rate for this fiscally juiced-up quarter.”
That same model was 7.9% a week ago and 10.3% a month ago, he notes. Another trend exhibiting a down move in growth might already be in the making.