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Mark Hulbert
March 31, 2010, 12:01 a.m. EDT · Recommend (2) · Post:
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By Mark Hulbert, MarketWatch
ANNANDALE, Va. (MarketWatch) -- It's always dangerous to think you know more about something than does the market itself.
And this is especially the case when it comes to bonds, since the fixed-income market is the largest and most liquid in the world, and its participants include some of the best and brightest of the entire investment arena.
But that does not deter Dan Seiver, who confidently predicts that yields are headed higher over the next year or two, with the 30-year Treasury yield /quotes/comstock/20m!i:tyx (TYX 47.57, -0.06, -0.13%) very likely hitting the 6% level. If he's right, of course, then Treasury bond prices are headed much lower.
Seiver is a visiting finance professor at San Diego State University and editor of an investment advisory service called the PAD System Report. He deserves to be listened to because his rate forecasts have been mostly on target over the last year. ( Read my Dec. 15, 2009, column.)
Seiver's arguments for why rates are headed higher are familiar: The economic recovery is gathering steam; government deficits are larger than even the pessimists were predicting a couple of years ago that they would be -- and getting worse; the government's bond rating is in danger; inflation will continue to worsen; the dollar will continue to lose value; the Federal Reserve eventually will have to end its quantitative easing; and the demographic trend towards an increasing proportion of society in retirement will overwhelm Social Security, Medicare and other government programs, to name a prominent few.
But none of these arguments is new. Why, I asked Seiver in an interview earlier this week, is the rest of the bond market looking at these same phenomena and not agreeing that rates are headed much higher?
By way of an answer, Seiver referred to a number of behavioral factors that keep many bond traders and investors, if not most, from recognizing the reality of the situation.
Take the terrible state of government finances these days, which is awful and getting worse. Seiver believes that Americans are not very good at responding, since there is no one well-defined crisis point.
"Americans are good at dealing with acute crises," Seiver said, such as the 9-11 terrorist attacks. The deterioration of government finances is, in contrast, long-term and gradual. Instead of an acute crisis, it's a matter of "steady erosion."
It's reminiscent of the oft-quoted difference between throwing a frog into boiling water, on the one hand, and gradually heating the water in which he is already swimming, on the other. In the former case he will immediately jump out, whereas in the latter case he will eventually boil to death.
Inflation is another illustration of the point Seiver is making. The difference between 1% and 3% annual inflation means relatively little in any given year. But over the life of a 30-year Treasury bond, the cumulative difference is huge.
Seiver's overall point: Bond traders and investors, because of these and related behavioral factors, systematically underestimate the severity of these factors.
Seiver's point is reinforced by the findings of a fascinating behavioral study several years ago. Entitled "Attention, Demographics, and the Stock Market," the study found that very few of us are able to focus on events many years into the future, even when those phenomena are quite predictable and are sure to have a large impact on our investments. (The study's authors are Stefano DellaVigna, an assistant professor of economics at University of California at Berkeley, and Joshua Pollet, an assistant professor of finance at Michigan State University. Click here for a copy of the study.)
The bottom line? An investor buying a 30-year Treasury bond today, and intending to hold until it matures in 2040, faces overwhelming uncertainty about the future and, consequently, a huge amount of risk.
Do you really think a yield of 4.76% -- the 30-year's current rate -- is high enough to compensate for that risk?
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of investment advisory newsletters. The HFD became a service of MarketWatch in April 2002. In addition to his regular columns for MarketWatch, Hulbert writes a column on investment strategies for the Sunday New York Times, a monthly column for Barron's.com and a column on newsletters for the Journal of the American Association of Individual Investors. Dow Jones and MarketWatch are launching a weekly newsletter, Hulbert on Markets: What's Working This Week.
In an era of corporate belt tightening, cutbacks and layoffs, news that Kraft CEO Irene Rosenfeld's paycheck jumped 41% last year is bound to give some investors heartburn.
5:20 p.m. March 30, 2010 | Comments: 14
- koot | 12:17 a.m. Today12:17 a.m. March 31, 2010
"Play ball: 9 burning questions for 2010 http://on.mktw.net/crftxJ" 11:16 p.m. EDT, March 30, 2010 from JonMediaWeb
"12 discarded blown out unbrellas in 6 blocks. Cheap umbrellas ain't green. Just sayin'." 9:52 p.m. EDT, March 30, 2010 from codywillard
"Investing requires a mental balancing act: If the financial system is going to crash again in the not too dis... http://on.mktw.net/bib9Oj" 5:23 p.m. EDT, March 30, 2010 from MKTWCoombes
"I talk to Marketwatch about why now's the time to bet on higher rates and how. http://bit.ly/cB0nm6 $$ $CIEN $QCOM $AAPL $$" 2:40 p.m. EDT, March 30, 2010 from codywillard
"RT @ryanavent: Volcker: "It doesn't make me at all nervous that we have 0% price inflation at the moment."" 2:01 p.m. EDT, March 30, 2010 from davidweidner
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