Friday, April 17, 2009

Treasury Indecision

If one considers that the bond market is the best crystal ball of the investment climate, since February it's lips are sealed. After a chaotic flight to quality near the end of last year when investors cared more about return OF capital rather ON capital the Treasury bond market has been very quiet. With returns on treasuries pinned near zero it is hard to envision much room to rise unless inflation rates remain below zero for longer. During the height of the buying frenzy in treasury bonds at the end of December buyers of short term government bonds were accepting less than zero rates of return.

In the chart above, the blue line is TLT, the 20+ yr Treasury Bond ETF, while the red line its alter ego,TBT, the negative long treasury bond.

Yesterday the short term zero coupon return touched 0.01%, effectively nothing, yet at the same time stocks continued to rise. There is a disconnect here that I suspect will reveal itself shortly. The bond market is showing an extreme aversion to risk and the equity market storming ahead.

John Barnyak