The Street says 'no' to bonds, but should investors?

It’s that time of year again. You know, the wonderful season when Wall Street’s strategists come out of their shells en masse to make predictions about the year ahead.

What are they prophesying? Wall Street foresees grave danger and disaster in the bond market.

As Bloomberg reports: “With Federal Reserve Chair Janet Yellen poised to raise interest rates in 2015 for the first time in almost a decade, prognosticators are convinced Treasury yields have nowhere to go except up. Their calls for higher yields next year are the most aggressive since 2009, when U.S. debt securities suffered record losses.”

This time around, the median forecast among Wall Street’s strategists, according to Bloomberg, calls for 10-year U.S. Treasury yields to reach 3.01% by the end of 2015. The roughly 0.75% rise would be almost double the amount forecasters anticipated for 2014!

You can now start playing “I’ve heard that song before” by Harry James. Why? Because you have! At the start of 2014, all 72 Wall Street strategists polled by Bloomberg – the same list of characters being polled about 2015 – confidently predicted that bond prices would fall and interest rates would rise.

How did that prediction turn out? The yield on 10-year Treasuries has done the exact opposite of what Wall Street predicted by crashing 27% to around 2.19%. And since bond prices go up when yields fall, bond ETFs like the iShares 20-Plus Year Treasury Bond ETF (TLT) have soared almost 25%, easily outperforming the Dow Industrials, S&P 500, and gold.

By the way, the prestigious list of top performing ETFs for 2014 is led by funds that double and triple their daily performance to long-term U.S. Treasuries.

Over the past year, ETFs like the ProShares 20-Plus Year U.S. Treasury ETF (UBT) and the Direxion Daily 20-Plus Year U.S. Treasury Bull 3x (TMF) have skyrocketed by 57% and 94% respectively. In other words, look at the tremendous gains you would’ve missed by listening to Wall Street’s predictions!

For further context, this incorrect macro view (fancy language for bad advice) of higher rates and lower bond prices has been perpetrated not just at the beginning of 2014, but throughout the year.

Here’s what they were saying:

“Doug Casey: Bond Bubble Blowing Up” – USAWatchDog.com, Jan. 29, 2014

“Beware the Bond Bubble” – Mauldin Economics, May 27, 2014

“Beware the Enormous Bubble in Bonds” – MarketWatch, Aug. 29, 2014

“David Tepper: ‘Beginning of the End’ of Bond Bubble” – ZeroHedge, Sep. 4, 2014

Now that Wall Street’s prediction of a Great Bond Market Crash in 2014 has utterly failed (along with similar predictions over the past five years), we’re still left with one big question: How long will it take for U.S. bond yields to finally hit rock bottom?

“Historically, the bottoming process for US Interest Rates takes 10-15 years,” we explained in the December 2014 issue of the ETF Profit Strategy Newsletter.   

“The bottoming process in rates during the 1820s-1830s took over 10 years after the Erie Canal was finally completed changing the landscape of America forever. The bottom in rates during the 1890s-1910 took about 15 years, and [it] wasn’t until after the panic of 1907 that rates really started to rise. Then the bottom in rates during World War II took another 10-15 years to bottom out,” we said.

If we count 2008 as the beginning of this current “bottoming cycle” in bond yields, that would imply at least another four to nine years of a low yield environment, based upon historical norms of 10-15 years.

That also would imply more good returns ahead for bond investors because bond prices rise when yields fall. Let the trend in interest rates and bond prices be your guide, not meaningless predictions.

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Ron DeLegge is founder and chief portfolio strategist at ETFguide. His next free Portfolio Workshop for financial advisors is set for 1 pm ET on Friday, Jan. 16.