For a person in love with bonds, the beginning of 2013 has been quite trying. The 10-Year Treasury, yielding 1.70% on Dec. 28, is now about 1.85%. I firmly believe that the deleveraging cycle has a few more years to go, but the idea that the bear market in bonds may indeed begin at some point this year keeps raising its ugly head. The primary reasons behind the recent fall in bond values/rise in yields were: a) massive policy stimulus and virtually unlimited commitments by the Federal Reserve and the European Central Bank partially normalizing growth expectations; b) incoming data turning out to be better than expected; and c) the prospects of a recovery in emerging markets, primarily driven by stabilization of growth in China.
But much like 2011 and 2012, I don’t think that the bear market for bonds scenario is going to play out just yet. Again, four reasons for that assertion:
a) The data in the U.S. has already turned down. It’s still good but the momentum is certainly fading.
b) China is stabilizing but the question is by how much.
c) The depreciation of the Yen will lead to export of U.S. demand and support for Treasuries. We have another buyer of Treasuries away from the Fed – the Bank of Japan.
d) The prospects of a potentially drawn out debt ceiling debate and the fiscal drag from the payroll tax hike may have unexpectedly large impact on consumer demand.
The bottom line: While Treasuries do not have much room to rally, the likelihood that we’ll see a 2.25% yield on the 10-year Treasury before mid-February, something that I had been fearful of, is very unlikely to come about, in my view.
Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share prices can fall.