LONG US GOVERNMENT BOND VIEW. Bottom Fishing. Yep, I keep fishing for a bottom in the “long” US Treasury bond. I mean a bottom in yield, a top in price. All logic I can come up with says the 25-year bull market run to ever lower long term interest rates is over or ending. All but two items. One, the constant “flight-to-safety” trade of getting out of all investments and parking the proceeds in the safest US investments possible ever since last summer (when the subprime mess first appeared). And two, the US economic slowdown. OK, I understand. Investors have historically bought US Treasuries for safety. And if we go into a deep recession, which can be very deflationary, interest rates should come down.
STILL, looking past these two temporary, near term factors, the larger macroeconomic backdrop tells me the long move toward ever lower interest rates is over. First, former Federal Reserve Chairman Alan Greenspan has said such, that during his 18 year tenure as Fed chief he was greatly helped by low and lower inflation caused by globalization. But that his predecessors won’t have that luxury of quiescent inflation. Second, now that China is raising their export prices, for eight straight months, and raising their minimum wage, from 17% to 50%, that’s removing the balm of very low wage labor which has kept global prices down. Third, I saw Marc Faber, the well-known Swiss investor, say on CNBC yesterday that the long US Treasury market is extremely overpriced and will prove a disaster for investors loading up on them at today’s historically low yields. I agree. Finally, of course we have the rest of the world already packed to the gills with US Treasuries, not a good sign when everyone is on only one side of a trade. Schwartz View: Bottom line, I keep trying to find a good entry point to fade, sell against, the last eight months of strength in treasuries. I’ve gotten in, buying RRPIX (ProFunds Rising Rates Opportunity Fund) and RYURX (Rydex Inverse Government Long Bond Strategy Fund) in the past and then had to get back out and take a small loss when yields fell. But now I’m back in once more, again fishing for a bottom. I would suggest you do the same; buy either of these inverse funds on weakness. Start small and if you get a profit buffer, buy more. Disclaimer! I own small portions of the two funds mentioned above.