Bond Market Bounces Back as Equities Stumble

Author Larry Berman

Posted: 1 May 2012 re-posted from etfcm

AGG: A few weeks ago many were calling for the end of the treasury bull market. The economy was recovering and yields were heading higher. Since that false start, Bernanke and the FOMC has reiterated the need to keep rates low through 2014 and that more QE is on the backburner if needed. And viola, the bond market has bounced back to near all-time highs as equities start to stumble. Investors can get used to this behaviour as we still see it lasting for years.

Emerging market debt (EMB) is somewhat overvalued given the inflation risks (real returns are extremely low), which suggests currency risks are rising. Peripheral Europe (IGOV) remains a basket case and currency risk is extremely high. High yield (JNK, ZHY) is more correlated to equity market risk and is showing strong evidence that we would want to avoid it for now. The global deleveraging that needs to take place will likely cause stress for the next decade. Significant defaults are likely before it ends and there is flight to safety value in the Treasury markets of Germany and the US. Japan may see some stress in bond yields, but QE will persist.