Treasury Bonds Imply Recession: Independent Financial Advice
Posted by Don Martin on Thu, Jan 12, 2012 @ 06:32 PM
Treasury Long Bond: What is the market telling us?
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The 30 year Treasury has maintained a relatively steady price after a huge run up in the summer of 2011. Since the huge upward move in July its price has stayed above the 50 day moving average except for a few days. Since late July it has been way above the 200 day moving average.
At year end the price kept rising as portfolio managers sought to make their year-end statements look better by adding Treasuries to their portfolios, so I was worried the price would go down in January. As of January 12 the price has only dropped 1% since year end.
The unemployment rate has dropped 0.5% in the past year but long term Treasury prices using the ETF “TLT” for example, have increased from 94.12 to 121.25, a 28.9% price increase. Typically when unemployment drops then bond prices go down and interest rates go up. Since hiring managers in non-financial companies may be less sophisticated about the economy than bond experts it is possible that the long term Treasury bond market is predicting a new recession. John Hussman said on January 9 that the jobless rate has gone down as the economy was heading into recession because unemployment is a lagging indicator.
Regarding the unemployment report of January 6, 2012 I wrote an article “Jobless report no threat to bears”. The improvement in the employment report that day resulted in the bond price going up 0.75%. Normally an improvement in the jobless rate would result in bond prices declining.
I continue to believe in investing in investment grade bonds, although investors should carefully assess their unique risk tolerance and sophistication to see if they can handle the risk of long term bonds which can be hurt by a sudden surprise inflation shock.
Investors should seek independent financial advice.