by Amy Williams on Aug 20, 2010 at 14:05
Leading US market commentator Barry Ritholtz has likened the current environment for US Treasuries to the dot com crash of the nineties.
In a blog post entitled ‘Do US bonds resemble dot com stocks?’ The author of ‘Bailout Nation’, and CEO of quant research firm Fusion IQ, notes how the current environment for US Treasuries reminds him of the dot com stocks circa 1997-98 in three ways:
‘1) You knew momentum was taking them higher;
2) You knew it was going to end badly;
3) If you were honest, you admitted you had precisely zero idea when the day of reckoning would be.’
Commenting on the post, Ritholtz told Citywire ‘the US bond market is now in the final innings of a 30 year bull market. In 1981, ten year US Treasuries hit a high of 15.32%, now they’re at 2.6%’ (as at 16/08/2010) and there is almost no room left for rates to go lower.’
He also expressed fears over the continued attraction of US government bonds for foreign investors. ‘If you look at Japan, most of the investors in Japanese government bonds are domestic. In the US, the bulk of treasury holders are foreign,’ he said. ‘You have to convince them that it’s worth holding these bonds with a return of 2% or lower. It’s a tough sell.’
Ritholtz is clear on what he believes to be the cause for investors continuing to pile into the asset class: ‘In the US it’s a fear trade. In the fall of ’08 after the crisis treasuries had a negative yield. It literally cost you money if you held these bonds to maturity. That is irrational.’
‘I don’t buy into recession porn, this obsession with every negative data point. I’m not calling it a bubble but you know this is a fairly overbought market when people are piling into bonds blindly.’
However, speaking on CNBC television, former Neuberger Berman director Gary Kaminsky disagreed and thought people like Ritholtz are ‘missing the big picture’ and that a secular shift is taking place
‘The biggest disconnect right now is this idea that the bond market is saying one thing and the equity market another,’ he said. ‘There is a secular change that is happening, a social demographic change within fixed income and that’s why those that are calling for this bond bubble are really missing the big picture.’
‘There is a social demographic shift that is happening right now and the money that is going into fixed income isn’t going there as a trade, it’s not going in there as a short term investment, it’s going there because people don’t want to own equities.’
‘Institutions, pensions plans, endowments – they are voting with their capital and they’d rather have the fixed income investments and I don’t see anything in the near term that is going to change that.’
However, for Ritholtz, this view presents an opportunity. ‘When the world doesn’t want to hold equities, that’s where I want to be.’ Over the next month he says he will be building a list of stocks to buy when the time is right to get back into equities.
‘We are running about 80% cash now, and I have no idea when market conditions will lead us to pull the trigger on our purchases,’ he said. ‘My wild guess is sometime before January — but that is only a guess.’
When asked whether investors should consider high yield bonds instead of equities to temper equity risk aversion, Ritholtz said: ‘If you want to go safe, you never go junk. It’s a losing strategy over the long haul.’
‘The problem with the 100 year floods is that they come every 10 years. It’s the same with recessions, there is always another around the corner’ That’s why he believes investors should buy companies that are strong enough to withstand difficult financial environments.
However he does agree with CNBC’s Kaminsky in terms of investor sentiment shift.
‘If you look at the last crash the stock price didn’t come back up until 1954 so from 1929 – 1954 an entire generation of investors were lost,’ he said.
‘The same thing is happening again as after the crisis, Madoff and all the bailouts, the general public has reached the point where they do not want to be in stocks when the exchanges are rigged against them. An entire generation of investors are now saying screw you, I’m taking my ball and going home.’