I’m generally not a big fan of buying Treasuries. They’re heavily manipulated. They are usually viewed as much safer than they are. They help to fund the federal government, which is not one of my favorite things in the world. However, I think now is possibly a time that owning long-term Treasuries for a trade could be a relatively low-risk way to make some money over the next six months.
Negativity about long-term Treasuries among money managers and retail investors possibly has not been worse since at least 1999 and maybe not since 1980. In a recent survey, less than 3 percent of investors responded that they are bullish on Treasuries. The really strange part about all this negativity is that inflation is at extremely low levels today versus much, much higher levels back in 1980 and 1999.
Treasuries have been declining, as yields have been rising, since August. The iShares 20-plus Year Treasury Index (TLT) is down nearly 20 percent during the past five months. Everyone is expecting stocks, commodities, and corporate bonds to do much better than Treasuries in this environment of high government borrowing, QE2, huge deficits, tax cuts, and increasing economic growth.
The interesting thing, though, is that long-term Treasuries, despite their bad performance the past few months, still are clearly in a long-term bull market that began all the way back in 1981. It is truly amazing that an asset class that has performed better and more consistently than any other major asset class for 30 years is viewed so negatively by so many investors. What this suggests is that many investors still don’t believe that long-term Treasuries are a good investment even though the long-term data suggests that they are wrong.
Of course, all bull markets come to an end at some point. Investors point to rising commodity inflation, government deficits, excessive money printing by the Federal Reserve, and dollar depreciation as factors that will ultimately destroy the value of long-term Treasuries. All of these factors may, at some point, cause Treasuries to enter a bear market, but they haven’t so far. Further, there are solid economic reasons why Treasuries should continue to be in a bull market.
Despite commodity inflation, America is clearly in a deflationary environment Commodities represent less than 15 percent of overall prices in the U.S. Services, which are mostly wages, represent about 70 percent of prices. Wages are not increasing. They are declining. This is likely to continue for a long time until unemployment falls substantially and capacity utilization rises substantially. This could take many years.
Paradoxically, high commodity prices further depress economic growth in the U.S. This further promotes deflation of everything else. There is now wide recognition and consensus that government spending needs to decline. The upcoming battle over the debt ceiling is viewed by many as a negative for Treasuries, but I could see it as having the opposite effect and actually supporting them.
Similarly, fears over a collapse of the dollar seem a bit overblown when you consider the alternatives of the euro, yen, pound, and RMB. All of these other currencies have major problems with them that are at least as bad as the problems with the dollar.
Another reason Treasuries could be good for a short-term trade is the likely correction that is soon to arrive in stocks, commodities, and other risky assets. These risky asset markets are heavily overextended, overbought, and bubbling with euphoric sentiment. Even if the bull run in risky assets has legs for a while longer, a correction is long overdue. Treasuries are typically the most favored anti-risk investment that investors use to park their money when risky asset markets are declining.
For all of these reasons, even if you’re not a fan of long-term investing in Treasuries, now may be a good time to buy some for a trade or a hedge against your risky asset holdings. Even if you’re unshakably bullish, this would be a good insurance policy for a portion of your portfolio. It’s also a much less risky way to hedge your exposure to stocks or commodities than going short. Something to at least think about as everyone is rushing to take as much risk as possible these days.