August 1, 2013

Why Bond Prices Won’t Go (Straight) Down—Searching for Alpha for August 2013

“Taper talk” has been a significant detriment for fixed income investors. Word that the Federal Reserve might start to slow down on its asset purchases resulted in big losses over the last few months for bonds, with the long-term Treasury ETF (TLT) price off 13% since the beginning of May. However, the worst may be behind us—at least for a while—if inflation remains muted.

A year ago, 10-year Treasury notes were yielding 1.66%. With 12-month CPI at 1.70% at the time, that investment would have resulted in a negative real yield. Fast forwarding to today, yields are now at 2.63%. The recent downtick of the CPI to 1.40% should put a little wind in the sale of Treasury prices, or at the very least, alleviate fears of a meltdown in the fixed income market. 

That should help equity prices. A few months ago, bonds were selling off so quickly that stocks got caught in the whirlwind. With the risk of a significant downtrend in bonds lessened, investors can concentrate on earnings and other relevant (and generally bullish) macroeconomic data points.

 

Click to enlarge

Reprints Discuss this story
This is where the comments go.