There are a lot of reasons why I’ve hated long-term bonds of all stripes for more than a year.
Lackluster auction demand from traditional, foreign buyers of our bonds; the increasing dysfunction in Washington, which raises the risk of more credit-ratings cuts; the long-term risk of inflation, which erodes the value of the fixed coupon payments you get from bonds.
And domestic bond fund and ETF selling. That last one is a doozy, by the way, with the latest figures showing that bond dumping continued into October. We’ve now seen five straight months of net outflows — totaling more than $128 billion.
|Investors have pulled more than $128 billion out of bonds over the past five months.|
But one key reason is also relatively simple: Where’s the crisis that requires crisis-era policies? There simply isn’t one, no matter how much the Federal Reserve apologists try to justify the most aggressive quantitative easing since the 2008 crash.
Look at initial jobless claims. Look at job creation. Look at GDP growth, or confidence, or anything else. None of these economic indicators are near or at the depths seen in 2007-2008 when the economy and credit markets were crashing.
Then there’s the ISM manufacturing index, a benchmark survey of economic activity that has been conducted since 1948. This is no minor report, it’s right up there with the monthly jobs survey in terms of importance. And the story it’s telling is very important as far as I’m concerned.
You can see that the ISM rose to 56.4 in October from 56.2 in September. Not only did that beat expectations for a decline, it was also the highest level going all the way back to April 2011.
Moreover, it’s entirely consistent with the kinds of readings we’ve seen over and over again during economic expansions. Those were periods when the federal funds rate was running in the mid- to high-single digits, not a range of 0 percent to 0.25 percent, and when the Fed wasn’t doing any QE, much less $85-billion-per-month.
It’s not just manufacturing that looks OK, either. The ISM Services index rose to 55.4 in October from 54.4 in September. That beat expectations, too, with both the production and employment gauges improving.
Now, it’s not like I’m a raging bull on economic growth. I think we still face plenty of challenges, especially over the longer term. But there is no economic justification whatsoever for the current pace of QE or the current level of interest rates — and that is yet another reason why the “no taper till kingdom come” argument is all washed up.
So if you haven’t dialed down your fixed-income exposure, don’t wait any longer. Bonds remain largely a sucker’s game as far as I’m concerned. The only things you should consider in this rising-rate environment are shorter-term securities or funds with minimal durations and average maturities, or investments like floating-rate notes. You can find more details on these kinds of alternatives in my Safe Money Report.
Until next time,