Is the Run in U.S. Treasuries Over?
Ron DeLegge, Editor
October 27, 2011
Stocks have had their best monthly rally since 1987. The S&P 500 index (NYSEArca: SPY) has gained around 12% during the month of October. Is the worst over?
The risk on/risk off barometer is right now saying the market is in risk taking mode. And while stocks have gained, government bonds (NYSEArca: TLT) have fallen. Is it time to unload U.S. Treasuries?
Help from Europe
While European stocks (NYSEArca: VGK) have lagged most of the year, Greece has a plan! How many times have we heard that? Anyway, banks holding Greek debt conceded a 50% cut for Greek debt being held by private investors. Bond investors were forgiving with Greece, but will that be that way with other debt saddled countries that want a break?
Meanwhile, the European Financial Stability Facility (EFSF) – Europe’s main weapon against toxic debt contagion - was strengthened. According to some reports, EFSF could provide guarantees up to $1.4 trillion for bonds in troubled eurozone countries. “The worst is over! The worst is over!” one Wall Street analyst was heard shouting.
History, a Few Months Ago
In the face of the U.S. debt ceiling crisis and a downgrade in the U.S. government’s credit rating, the Treasury market (NYSEArca: IEF) was destined to collapse. As it turns out, these bold proclamations coming from Treasury bears like PIMCO’s Bill Gross (Nasdaq: PTTAX) and others weren’t just wrong, but overblown.
On July 27, just ahead of the August debt ceiling deadline here’s what ETFguide’s Weekly ETF picks said:
“Our first recommendation is to ignore the noise being spread by major media establishments. No matter how much their headlines make it seem that a deal will not get done, the historical odds show the exact opposite. Since 1960, Congress has acted 78 separate times to permanently raise, temporarily extend, or revise the definition of the debt limit. And while losing the coveted AAA-rating is bad, it isn't a total disaster. Even with a downgrade, U.S. debt would still be considered ‘investment grade,’ so by that standard, bond funds and ETFs linked to major indexes would still hold U.S. paper.”
Throughout the debt limit debacle, ETFguide continued to hold U.S. Treasuries in its Ready-to-Go ETF Portfolios and it warned subscribers to "not bet against history."
Today, the future movement of U.S. Treasuries is already being shaped. And again, the crowd and its conventional wisdom will be proven wrong. ETFguide’s latest analysis of Treasuries in its Weekly ETF Picks looks at long-term Treasuries and outlines three key catalysts for this market. It highlights technical levels for Treasuries and a way for ETF investors to capitalize.