Friday, August 20, 2010

More Headwinds for Treasury Bond Bulls: Goldman Turns Bullish

Talk about coming so late to the party even the good leftovers are gone. Zero Hedge reports that a Goldman Sachs technical analyst espies much higher prices ahead for long-term Treasuries after one of the most amazing rallies ever seen. Capitulation, anyone? Wanna short the euro at $1.20?

Sarcasm aside, I am not actually disagreeing with Goldman's Noyce. I tend to agree, but in the fashion as follows: about a year ago (timing may be off), I read somewhere, perhaps, that Goldman's London office had turned strategically bullish on 10-year Treasury yields dropping to about the 3% level. This was after a small move down in yields, not a massive one, if memory serves. Well, the forecast was correct, but was premature. Far better buying opportunities lay ahead.

The 10-year Treasury is vastly overbought. Even most of the comments on Zero Hedge about the article were positive to neutral on Treasuries; usually ZH comments are pro-gold and assume that Treasuriees are going to default in the near future. The public mood is gloomy. And all stock traders know that hurricane season is very dangerous for stocks. Plus the stock charts don't look too hot. So it's easy to see hiding in the 10-year. If you're hiding from a threatened financial storm, you don't really care if your aggregate income over 10 years from your $100 is $25 or $30 (2.5% vs. 3% yield).

But as an investor, I agree with Drs. Rosenberg and Shilling that the main point of owning long Treasuries at these low rates is for capital gains. So I've sold out of my Treasuries. I do own munis for income, as well as short duration Ginnie Maes (not Fannie or Freddie) MBS with yields similar to that of much longer duration Treasuries (and with principal paydown as well as interest). I have no interest in selling those securities at today's prices.

I remain in the stagflation camp. I don't believe in fighting the Fed. The Fed wants a low level of rise in the consumer price indices, or at least so they say. I believe that as in 2007-8, and as was the case after the Great Crash 1929-33 and until Paul Volcker came on the scene, the Fed will be behind the curve re short-term interest rates and price rises.

Got inflation hedges?

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