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What QE’s End May (Really) Mean for Bonds

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“The report of my death was an exaggeration.”

That’s what Mark Twain actually wrote to the media in 1897 when they inaccurately reported that he was gravely ill and near death. (Actually, it was Twain’s cousin James Ross Clemens who was seriously ill in London, and appears that some reports confused him with Samuel Clemens, aka Twain.)

What happened to Twain has also happened to the U.S. bond market. The death of Treasuries has been greatly exaggerated.

Although stocks have gotten most of the attention after setting one all-time high after another, ETFs linked to long-term U.S. Treasuries have effortlessly outperformed stock; this means products like the iShares Barclays 20+ Yr. Treasury Bond ETF (TLT) along with leveraged cousins like the ProShares Ultra 20+ Yr. Treasury Bond ETF (UBT), and Direxion Daily 20+ Yr Treasury Bull 3x Shares (TMF).

Most mainstream media enterprises have largely missed or ignored the story of bonds beating stocks in 2014, because it’s an unsexy narrative at odds with their equity bias. And that bias has largely mimicked that of Wall Street’s.   

“Coming into 2014, 67 out of 67 Wall Street economists that were polled all said interest rates were heading higher and to sell bonds,” said J.C. Parets, founder of Eagle Bay Capital. “We’ve had one of the best years in the history of the U.S. bond market, and we’ve been trading these guys for 200 years.”

Since the start of 2014 through the end of October, TLT gained 19.5%, while the SPDR S&P 500 (SPY) gained 10.5%. Due to their use of leverage, UBT and TMF have been even bigger winners, jumping 41% to 65% higher, respectively.

The huge gains for long-term Treasury investors are particularly notable because of all the doom and gloom that’s stalked them virtually every single year since the 2008-2009 credit crisis. 

In 2011, the U.S. Treasury market was purportedly going to collapse because of the U.S. debt ceiling crisis. What happened? Treasury ETFs like TLT gained 33.96%, beating out its 33.92% gain in 2008. 

In 2012, TLT had a modest gain of 2.6%, followed by a 13.6% decline in 2013. Although last year wasn’t a good year for Treasuries, it certainly wasn’t the bloodbath that Wall Street’s fortunetellers have been relentlessly predicting.

Instead of following bond price trends and obeying the market, Wall Street persisted in its stubborn forecast of a bond crash.

These entrenched views were helped further along by supporting opinions which viewed the Federal Reserve’s end of QE3 (bond purchases) as a guaranteed death blow. “If the Fed doesn’t buy U.S. Treasuries, who else is going to?” has been the populist argument against owning bonds.

Meanwhile, bond prices continue to march higher. And in a post-QE world, who knows what comes next. Will the bond market shock the world by dismantling a few more ill-timed calls to sell or short bonds? 


Ron DeLegge’s is the founder and chief portfolio strategist at ETFguide. His next Portfolio Workshop for financial advisors is on Tuesday, Nov.18, at 1 p.m. Eastern Standard Time. Attendance is free.