Risk-off Sentiment Refocuses Attention on Bonds
The significant sell-off in the long end of the U.S. bond market has at long last resulted in the price of 10-year Treasuries to correctly reflect the state of the underlying economy. Since 1999 the yield on the 10-year Note has narrowly tracked the Conference Board's Consumer Confidence Index. In the second half of last year the yield dropped significantly below the level of the confidence index. It was either due to the market expecting an imminent double-dip recession or some other forces that were at work. In fact, it was the latter as a result of the culmination of QE1 and QE2 via the repurchase of government bonds by the Fed.
Since 1999:
Sources: I-Net; Plexus Asset Management.
Given the historical relationship between the yield on the 10-year note and consumer confidence it appears that the 10-year note is currently aptly priced at 3.40% compared to the sentiment index at 60.6.
Sources: I-Net; Plexus Asset Management.
The outlook for U.S. bonds undeniably rests on the outlook for the U.S. economy and especially consumer confidence. It is telling me that any weakness in the economy will solemnly be reflected in lower bond rates and a flattening of the slope of the yield curve. Conversely, if the U.S. economy maintains its upward trajectory yields may rise further, resulting in further losses in the bond market.
In the short term, bond prices appear oversold (yields overbought) as shown by the RSI indicator (bottom panel) in the chart below. Lower yields over the next few weeks will be consistent with "risk-off" type of scenario that seems to be unfolding. However, on a longer-term horizon one needs to keep a very close eye on the 28-year downward trend (resistance) line (not shown below) that could be threatened during the next kick-up in yields.
Source: StockCharts.com
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Author: Prieur du Plessis
Dr Prieur du Plessis
investmentpostcards.com
With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.
He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).
Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.
Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.
Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.
In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).
Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.
Copyright © 2008-2012 Dr Prieur du Plessis
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