By Michael A. Gayed
"Arriving at one goal is the starting point to another." - John Dewey
No one has been more wrong about the future than bond bears. That may be about to change.
For years, talking heads, analysts, and market prognosticators have been calling for higher rates. I can't begin to tell you how many conferences I've been to where at least one session was dedicated to "what to do when rates rise." Mind you, I've been going to such sessions with such speeches since 2011.
And while "haters" are always going to hate on those who call for a stock-market correction which doesn't come with hindsight, seemingly no one wants to go after the rising-rate crowd. This may be because nearly everyone has believed it for so long and been very wrong.
A broken clock, though, is right twice a day. I believe in the very near-term we are in an exciting period for market behavior, whereby defensiveness sells off and money rotates into true "risk-on" plays like cyclicals, commodities, and emerging markets. This will be important for defensive sectors to revert back to historical leaders of coming volatility, as shown in our award-winning papers (click here to download).
Visibly, this momentum seems to just be getting started and should it continue as our indicators suggest, then the global negative-yield phenomenon may come to an abrupt end. Anyone who remembers how German 10-year yields acted last year may feel deja-vu given the very real possibility that the low in yields has been seen, and a spike in rates is to follow.
I would not be surprised to see a repeat of what happened in the second quarter of last year. If a catch-up trade by high-beta stocks and emerging markets is under way, the yield curve likely begins steepening in earnest, resulting in meaningful bond-market volatility for a period of time (until an overshoot).
When I look at the price ratio of the iShares TIPS Bond ETF /zigman2/quotes/200600110/composite TIP +0.63% relative to the iShares 7-10 Year Treasury ETF /zigman2/quotes/202862654/composite IEF +0.63% , I can't help but think a base has formed and a bullish trend is coming in inflation expectations.
Is it time for vindication by the bond bears? I, for one, hope so. I'd love for bond yields to be higher than they are now so that on the next real stock correction and risk-off wave, there is at least cushion to benefit from that inevitable flight-to-safety trade whenever it comes. But if emerging markets and cyclicals keep running, it will be hard for that stock market correction to occur before a bond market one does.
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