Is it Time to Warm up to Bonds?

The US stock market has been in a waffling correction for several weeks, while the bond market has been in a panic.  We've seen a total change in sentiment concerning bonds.  The article linked below is a good example of that.

The buzzword today is "tapering" as the gurus' main topic is fear of the Fed tapering off their bond buying.  Let's put this in perspective.  The chart below shows the yield on the 10-year Treasury for the last 30 years.

Very obviously, the Fed drove bond yields slightly under the trend channel (shown in the chart below) last year - but not much.  The latest move up (not nearly as impressive in this long-term chart) has reversed that panic.  As noted above, the public sentiment has now changed and they are selling bonds at a record rate.  I can certainly see their "logic," but that is public logic and not necessarily smart logic.  Nobody knows how things are going to progress in the next few years, but look back and see how the bond market slowly moved up in that trend channel (in the chart above) in a similar time when the Fed slowly started to "taper" off its monetary policy - in 2004 (red circle above).  It took three years then to move to the top of the channel, and actually in a similar juncture to today, the yields pretty much waffled sideways for two years.

However, we'll continue to let our Bond Momentum Gauge be our guide as this situation evolves.

Don Hays

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