If the economy keeps showing signs of improving, steady growth in jobs, then eventually it will chip away at the negative confidence that Americans and investors have after the financial crisis.
In a way, investors hiding out in cash and bonds hold the key the stock market around. We could see a waterfall of cash move off the sidelines and tumble into equities if yields spike. Basically, investors have pulled about $2 trillion out of equities after the financial crisis and moved into fixed-income.
Improvement in the monthly jobs reports and housing data should bolster confidence, although an interesting question is what happens to real estate prices if mortgage rates creep higher from historic lows.
The government finally reached an agreement on the fiscal cliff at literally the eleventh hour. The details need to be hammered out but at least this episode appears behind us.
The Fed minutes this week suggest that the central bank isn’t going to buy bonds forever. Hopefully we can begin moving toward more normal circumstances and less stimulus from the Fed.
Of course, the Fed says it plans to keep short-term rates near zero until at least mid-2015. Most investors take that to mean the economy and jobs market won’t be healthy until then, so they’re writing off the next couple years. Weaning the market off Fed support should be painful at first but ultimately would be healthy for markets.
The bottom line is that continued economic improvement and the Fed hinting at light at the end of the tunnel should push Treasury yields higher and related bond ETFs lower. Investors who flocked to Treasury funds and ETFs need to be careful here. Treasuries will be anything but “safe havens” if yields continue to rise.
iShares Barclays 20+ Year Treasury Bond
Full disclosure: Tom Lydon’s clients own TLT.