by Mike Lim
Short bonds at your own RISK! This should be a poster stuck on every retail trader's trading room. The bond market has been in a bull market since the late 1980s. Don't believe me? Pull up a 30-year chart of any TSY product and you'll see that it has been in a sustained uptrend.
It doesn't matter that when we are in a boom period, bonds still kept getting bid. The world still comes to the US to buy these safe-haven products. It is even more trivial nowadays when the 10-year TSY is just at the inflation rate. I get asked a lot, "Why would anyone want to park their money at something that offers little to no yield?" Let's look at a few fundamental reasons shall we:
Low Interest Environment
Have you opened a CD lately? Have you checked the APR on your savings account? You will probably see that the annual interest is no more than 1% (IF THAT). In the search for yield especially in this global environment where most nations offer dismal rates of return, savers would prefer bonds. Now these are not just any bonds but bonds drawn from strong sovereigns like Germany and the USA.
Like the guy who'd rather put his cash under his mattress than give it to some bank somewhere, savers bet on bonds because they have the full guarantee of the US government. This unquestionable trust that the US government is sound and will always be able to guarantee the repayment of the investment made when maturity comes. About 70% of the country's population reside in this space. Not everyone is cut out to be an investor or trader. Try this sometime: when you go on the subway, ask 5 random people whether they would rather put their money in bonds/savings accounts than the stock market. You will be quite surprised of the reply!
Nowhere Else To Go
This one is not really a reason but more so an acceptance of the ever changing global economic climate. Europe is about to go under. Asia isn't always for everyone out there - just the brave few. Emerging markets still have risks associated with them. You cannot bet your retirement or kid's college fund on the chance that perhaps India could prosper 10-20 years from now. People want relative safety and where can they go? They go to countries that issue debt that they perceive as having strong balance sheets and have good prospects for growth down the road.
Traders both large and small continue to keep buying bonds as a means of long term investment and also to hedge their other risky positions. This is what brings upon a conundrum to the whole situation of unstable or illogical markets. We have seen markets rise as bonds also rise. This big disconnect continues to boggle a lot of traders.
So I close with this for some later reflection: At some point when interest rates rise, will the bonds really react accordingly?
Traders from Equity Sense will be writing on this blog on positions and other market-related things.