David Rosenberg: Government Bonds are on Fire
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November 27th, 2009 by AdvisorAnalyst
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In today’s Breakfast with Dave, Gluskin Sheff’s Rosie says:
Government bonds are on fire. Yesterday we saw a 10bps slide in the German Bund and U.K. Gilt yields - they are consolidating today - and U.S. 10-year yields are now down about half that amount, to 3.22% - 2bps from taking out the October lows, so keep an eye here for a possible technical breakdown in yields. The Canadian bond market already did that yesterday with the yield on the 10-year GoC slipping below the October lows - we have news for you: this was a major technical move. We can understand that government bonds are the “enemy” to the bulls (not once were Treasuries even mentioned as an asset class during my two-hour stint on CNBC the other day). But there is no denying that somebody is buying these bonds because the 7-year Treasury note auction ahead of Thanksgiving had $88 billion of bids for the $22 billion offering. Go figure, some folks clearly still have deflation on their mind (as they should).
We went into this latest round of turbulence with tremendous complacency in the marketplace (I really sensed it during the two-hour stint on CNBC’s squawk box on Tuesday) - rallies were still light-volume in nature (only two sessions in the past three weeks with NYSE volume north of a billion shares), the VIX index had just receded to its low for the year, at 20.5 (down 60% since March!), the bull share and bear share of the sentiment surveys hit late-2007 levels, and with the trailing P/E ratio at 27x and the forward P/E on $65 of earnings of 17x. There is no margin for error in an overvalued equity market - one that is priced for nearly 5% GDP growth. Remember, it was in the fourth quarter of 1987, a quarter that saw 7% GDP growth and a 55% earnings trend, that the S&P 500 cratered 30%. So, it’s not just about the economic backdrop, it’s what is being priced in - that is the lesson. For a highly overvalued market, it does not take much - like an off-the-cuff remark from the Treasury Secretary on the Meet the Press - to entice a massive round of profit-taking.
Don’t look now but the Baltic Dry Index has just slipped for the fifth session in a row, and down 12% from the November 19 interim high. Not a constructive near-term signpost for the commodity complex. However, as we said above, we look forward to a correction that allows us another opportunity to build long-term positions in this segment of the market where there are secular positive dynamics at play. But as we highlighted last week, anything connected to the U.S. dollar-carry-trade - a very overcrowded trade - is due for a correction.
To reiterate, the Swiss, the Russians, the Brazilians and the Vietnamese have all taken actions to weaken their currencies in recent weeks (see Russia Launches Campaign to Weaken Ruble on page C2 of the WSJ).
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Advisor Alert - November 27, 2009
Tags: asset class, Census Bureau, Chief Investment Officer, Congressional Budget Office, Economic Trend, Federal Budget Deficit, Federal Budget Outlays, Federal Deficits, Frank Holmes, Global Investors, Gold Equities, Market Groups, Medicare Medicaid, National Debt Clock, Reputable Sources, Social Security Benefits, Treasury Department, Trend Data, Unfunded Liabilities, War EffortsPosted in Bonds, Emerging Markets, Gold, Markets, Outlook, US Stocks |
