Perhaps ironically, all of the world’s economists signaled a belief that rates would rise in 2015. This time, the 10-year yield is supposed to travel from 2.17% to 2.75%. The belief had been that economic acceleration coupled with mid-year hikes on overnight lending rates would ultimately send yields higher. St. Louis Fed President James Bullard more or less backed this line of thinking by expressing that another “tantrum” could occur with the central bank looking to raise its target overnight lending rate. Bullard said on Monday, “We do have some potential for that today because the Fed funds futures path, the market based one, is a lot lower and shallower than the Fed’s actual (summary of economic projections).” he said. “So there is a mismatch there, that is going to have to be reconciled at some point.”
I hate to be blunt, yet, Bullard lacks credibility. When stocks were free-falling towards their first 10% correction in three-plus years – when the S&P 500 was fretting the end of the Fed’s QE bond purchases at roughly 9.9% off the recent peak – it was James Bullard who told the world (via Bloomberg Business) the Fed could consider delaying the end of bond buying. From tightening to easing in a blink of an eye? The mere suggestion that the Fed might wait to move was one of the most impressive and powerful indications that the Fed, no matter what its ultimate course, would continue to appease stock and bond investors with extraordinary submissiveness (as needed). The event even earned its own name, the “Bullard bounce.”
It follows that, once again, I do not see the 10-year spiking to 2.75% by year-end. Nor does it surprise me that the 10-year yield is lower on the year. I still believe that iShares 7-10 Year Treasury (IEF), iShares 10-20 Year Treasury (TLH) and iShares 20+ Treasury (TLT) represent relative value on a global stage where the world is aggressively easing. What’s more, these ETFs can effectively hedge against a sudden stock downtrend, correction or bear.
For those who prefer a multi-asset approach to stock hedging, the FTSE Custom Multi-Asset Stock Hedge Index (MASH Index) incorporates a variety of asset types that tend to perform well in stock sell-offs. The MASH Index includes U.S. bonds like long-term treasuries and munis, currencies like the U.S. dollar and the Swiss franc, foreign sovereign debt like German bunds as well as precious metals like gold. Over the last 3 months, the MASH Index is up 3.0%, whereas the S&P 500 is up 1.1%.