“The most important investment question of 2013 is ‘When will the great bond rally finally end?’” writes Nicholas Colas, ConvergEx Group chief market strategist, in a note Wednesday.
“Thirty-plus years of generally positive returns is an impressive record, after all. But it also engenders a lot of self-confidence in the minds of those investors who have seen their bond portfolios handily trounce stocks over the last decade and ‘Alternative’ assets such as gold for decades,” the strategist added. “Think a little pullback is going to shake this crowd? Think again.” [Will the Bond ETF Bubble Burst in 2013?]
Indeed, investors for years have heard warnings that yields could rise and inflict damage on bond funds and ETFs. It hasn’t happened yet.
Yields on the 10-year Treasury note fell back under 1.9% on Wednesday after dropping below 1.6% in late 2012.
“Brighter economic prospects, diminishing fears about a U.S. fiscal crisis and the idea that the beginning of the end is in sight for a period of ultra-easy monetary policy have sent government bond yields racing higher at the start of the year,” CNBC.com reported Wednesday.
“The main reason for rising yields is that Treasurys’ role as a safe-haven asset is declining and the economy is moving inexorably towards the first rate hike,” David Keeble, global head of interest rate strategy at Credit Agricole, said in the story. “Not only do we believe that the low point in Treasury yields has been hit but also that implied and actual volatilities will begin to ascend.”
Full disclosure: Tom Lydon’s clients own TLT.