[Following is a letter that my friend Doug Behnfield, a Colorado financial adviser whose thoughts have been featured here many times before, sent out to clients as the new year began. Doug is an unapologetic deflationist like your editor — a point of view that has served him well in recent years. Although February has been disappointing for investors weighted in long-term bonds, Doug sees them recovering, and yields falling even lower, as the U.S. economy fails to gain strength. For our part, Rick’s Picks has predicted a drop in long-term rates below 2%, and possibly to as low as 1.63%. If so, those who hold T-Bonds and long-term munis stand to reap substantial capital gains, since the longer the maturity, the more leveraged these assets are to even small changes in interest rates. RA]
1. want something to happen or be the case.
“Hang me just ez high ez you please but please don’t fling me in dat briar-patch!”
– Bre’r Rabbit
The performance of the bond market in 2014 took practically everyone by surprise (except for yours truly and a few money managers like my friends at Hoisington Management). Here is an excerpt from a great article in the New York Times that tells the tale: “For Bond Investors, That Other Shoe Still Didn’t Drop”:
“If you asked anyone at the beginning of 2014 where the rate on the 10-year Treasury would end the year, I don’t think anyone would have said lower, and most would have said one percentage point higher,” says Stephen Kane, a group managing director at TCW, which manages $110 billion in fixed-income portfolios, including the Metropolitan West Total Return Bond fund.
“Yet the bellwether Treasury note ended 2014 at 2.17 percent [it hit 1.72% today] after starting it at 3 percent. And while the United States economy showed some vigor — typically a trigger for rates to rise — global investors fleeing weakness in other markets were eager to buy American bonds. That demand pushed bond prices higher and yields lower.
“The upshot is that last year was frustrating only for the bond bears who have been waiting since 2009 for interest rates to rise from the abnormally low levels manufactured by Federal Reserve policy.” [click to continue…]