Most Attractive Investment Now: Shorting Bonds

Doug Kass TheStreet.com September 3, 2010

This blog post originally appeared on RealMoney Silver on Sept. 3 at 8:27 a.m. EDT.

I believe that, on a risk/reward basis, shorting fixed income is among the most attractive investment strategies in the year(s) ahead. Bearish economic concerns are overblown. There will be no double-dip. Most indicators point toward a domestic economic growth rate that is moderating but also likely to be sustained. The 2.60% yield on the 10-year U.S. note is discounting a double-dip. Over the course of the past 60 years, the 10-year note has yielded 365 basis points more than GDP growth. In other words, the fixed-income market is now discounting an unlikely 1% drop in GDP (2.60% less 3.65%). Over the same time frame, the yield on the 10-year U.S. note has averaged about 300 basis points more than the inflation rate. While zero-interest-rate policy argues for a somewhat lower relationship, since the implied inflation rate in TIPS is about 1.6% now, this would imply that the yield on the 10-year U.S. note should be closer to 4.60%, or 200 basis points above the current reading. 10-Year TIPS (Since 2008) Source: Bloomberg Numerous cyclical components of the economy (inventories, autos, housing) are at very low levels relative to GDP and substantially below their long-term trendline relative to GDP. This limits the likelihood of a double-dip, and in the fullness of time, a mean-reversion could add several trillion dollars against a $15.0 trillion GDP. Housing, in particular, stands ready for a gradual expansion that could be sustained for many years. Affordability is at a multi-decade high, mortgage rates are at generational lows, the value of home ownership vs. renting is back to mid 1990s levels, payroll growth should soon expand, and new-home production has fallen well below household formations for over two years. (Supportive of a positive forward-looking view was the 5.2% increase in pending-home sales in July reported yesterday.) While business indecision associated with tax and regulatory policy has led to disappointing payroll growth, most indicators (corporate profit growth, productivity, risk/credit metrics, average weekly hours, etc.) continue to point to an improving employment picture in 2011. More typical payroll growth could come sooner than many believe if the logjam of tax and regulatory is somehow relieved. Focused fiscal and/or tax policy geared toward job growth could unleash confidence and jump-start domestic economic growth, raising the probability of higher interest rates. Add Comment Tweet 1 2 Last » Next › var OutbrainPermaLink='http://www.thestreet.com/story/10852058/kass-beware-of-bonds.html'; var OB_Template = "thestreetcom"; var OB_demoMode = false; var OBITm = "1276003897985"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } adsonar_placementId=1341527;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=600;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; Featured Photo Galleries var galljs = document.createElement('script'); galljs.src = 'http://js.thestreet-static.com/files/tsc/v2008/js/_1283465400200/min/pages/gallery.js'; var head = document.getElementsByTagName('head')[0]; head.appendChild(galljs); Go to Slideshow Archive Business News From The Web BP Says Limits on Drilling Imperil Oil Spill Payouts New York Times Toshiba to Launch New Tablet Computer The Wall Street Journal. Employment Report Preview Calculated Risk A New Digital Battlefield The Wall Street Journal. More tax breaks on the way? Washington Post Apple-Facebook Friction Erupts Over Ping New York Times Ex-Googler Lee Backs China Companies to Foster Startup Culture BusinessWeek Online HSBC threatens to quit London HQ BBC Videocon May Sell Control of Mobile-Phone Unit, Executive Says BusinessWeek Online 6 Companies Hating the New iPod Touch Fool.com Headlines More Headlines TheStreet Premium Services Compare All Services Jim Cramer's Action Alerts PLUS: Now any level of investor can trade right alongside a Wall Street pro — and enjoy 24/7 access to his portfolio! Learn More Login RealMoney Silver: Get Doug Kass's exclusive trading diary + 5 of TheStreet's top premium services including Action Alerts PLUS and RealMoney — all on one streamlined page. Learn More Login Stocks Under $10: Break into the market with small- and mid-cap stocks... all $10 or less! David Peltier tells you exactly which low-priced stocks he's buying and selling. Learn More Login OptionsProfits: Get 50+ trade ideas a week from the industry's top options experts. Plus — exclusive commentary on market trends and essential trading tools. Learn More Login Breakout Stocks: Find tomorrow's household names today. Bryan Ashenberg finds hidden gems in exciting up-and-coming markets that he believes are ready to break out! Learn More Login RealMoney Portfolio PLUS ETF Action Daily Swing Trade Market Movers ETF Shark Alerts TheStreet Ratings Top Gun Trader Top Stocks try { function DM_onSegsAvailable(segs, cust_id) { for(var i=0;i //* Global Functions *// function metadataRegisterNS(ns){ var nsParts = ns.split("."); var root = window; for(var i=0; i Dow Jones S&P 500 NASDAQ 10-Year Note 10,425.38 1,102.98 2,228.86 27.10 Oil * 76.39 UP 105.28 UP 12.88 UP 28.85 UP 0.82 10 Yr 2.71% SPDR Gold 122.05 +1.02% +1.18% +1.31% +3.12% Data delayed 20 minutes Latest Trade Alerts See all function renderFeedContent(data){ for(var i=0; i < 2; i++){ document.write('' + data[i].headline +''); document.write('' + data[i].productName+' ($) - ' + data[i].publishDate + ''); document.write('

'+ data[i].callout +'

'); } } adsonar_placementId=1341369;adsonar_pid=879768;adsonar_ps=-1;adsonar_zw=320;adsonar_zh=280;adsonar_jv='ads.adsonar.com'; Brokerage Partners YAHOO.util.Event.on(window,"load",function(){ setTimeout(function(){ TSCM.util.attachScript('scr_intellitxt','http://thestreet.us.intellitxt.com/intellitxt/front.asp?ipid=10685'); },1200); }); document.write(unescape("%3Cscript src='" + (document.location.protocol == "https:" ? "https://sb" : "http://b") + ".scorecardresearch.com/beacon.js' %3E%3C/script%3E")); var beaconurl=""; if(TSC.util.isDefined(document)){ beaconurl=document.URL; try{ if (top.location != self.location){ beaconurl=document.referrer; } }catch(e){} } COMSCORE.beacon({ c1:2, c2:"6036014", c3:"", c4:beaconurl, c5:"", c6:"", c15:"" }); (function () { var d = new Image(1, 1); d.onerror = d.onload = function () { d.onerror = d.onload = null; }; d.src = ["//secure-us.imrworldwide.com/cgi-bin/m?ci=us-thestreet&cg=tsc&cc=1&si=", escape(window.location.href), "&rp=", escape(document.referrer), "&ts=compact&rnd=", (new Date()).getTime()].join(''); })(); Free Newsletters from TheStreet

After the Bell

Before the Bell

Booyah! Newsletter

ETF Daily

Midday Bell

TSC Top Ten Stories Newsletter

Winners & Losers

We respect your privacy. Manage Newsletters Podcasts [Select Podcast] The Real Story Wall Street Confidential Podcast Daily RSS Updates

TheStreet Mobile Edition

Connect with TheStreet

YAHOO.util.Event.on(window,"load",function() { try { var loginlink = YAHOO.util.Dom.get("logonoff"); var cookie = new UserStatus().streetCookie; if(cookie.indexOf('|')== -1){ loginlink.setAttribute("href",""); loginlink.innerHTML = "Log In"; } } catch(e) {} }); TheStreet Corporate | Home | About Us | Advertise | Customer Service | Employment | Privacy Policy | Sitemap | Topic Archive | Terms of Use document.write('

Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Terms & Conditions. Powered and implemented by Interactive Data Managed Solutions.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

*Oil Data in Market Overview is Brent Crude Pricing

'); TSCM.ads.AdPlacerx.sz = "728x90"; TSCM.ads.AdPlacerx.resetTargets(); TSCM.ads.AdPlacerx.calltype = "adj"; TSCM.ads.AdPlacerx.includeDcopt = true; TSCM.ads.AdPlacerx.additionalTargeting = ";;storytype=investingOpinion;kval=investingOpinion"; TSCM.ads.AdPlacerx.writeTag(); TSCM.ads.AdPlacerx.sz = "233x224"; TSCM.ads.AdPlacerx.resetTargets(); TSCM.ads.AdPlacerx.calltype = "adj"; TSCM.ads.AdPlacerx.adtype = "cau"; TSCM.ads.AdPlacerx.additionalTargeting = ";;storytype=investingOpinion;kval=investingOpinion"; TSCM.ads.AdPlacerx.writeTag(); TSCM.ads.AdPlacerx.sz = "336x280,336x850,300x250,468x648"; TSCM.ads.AdPlacerx.resetTargets(); TSCM.ads.AdPlacerx.calltype = "adj"; TSCM.ads.AdPlacerx.additionalTargeting = ";;storytype=investingOpinion;kval=investingOpinion;;storytype=investingOpinion;kval=investingOpinion"; TSCM.ads.AdPlacerx.writeTag(); /** * function wrapper that places all DART ads using TSCM.ads.positionToPlaceholder * if positionToPlaceholder can't find the elements specified, it just returns and is ready for the next call */ TSCM.ads.placeLazyLoadingAds = function() { // DART 1 (banner) TSCM.ads.positionToPlaceholder({ ad: 'ad728x90', placeholder: 'bannerContainer', flexibleHeight: false }); //DART 2 TSCM.ads.positionToPlaceholder({ ad: 'customUnit', placeholder: 'cauContainer', flexibleHeight: true }); //DART 3 TSCM.ads.positionToPlaceholder({ ad: 'boxAd', placeholder: 'boxAdContainer', flexibleHeight: true }); //DART 4 TSCM.ads.positionToPlaceholder({ ad: 'secondBoxAd', placeholder: 'secondBoxAdContainer', flexibleHeight: false }); }; TSCM.ads.placeLazyLoadingAds() window.setTimeout(function() { TSCM.ads.placeLazyLoadingAds() }, 2000); window.onresize = function() { setTimeout(function() { TSCM.ads.placeLazyLoadingAds(); }, 1000); }; YAHOO.util.event.onDOMReady( YAHOO.util.Dom.setStyle("lazyLoadedObjects", "visibility", "visible") ); var disqus_shortname = 'thestreet'; (function () { var s = document.createElement('script'); s.async = true; s.src = 'http://disqus.com/forums/thestreet/count.js'; (document.getElementsByTagName('HEAD')[0] || document.getElementsByTagName('BODY')[0]).appendChild(s); }()); /* */ NM_SmartSite_ID = '1001'; BF_BB_DATA = null; (function( ){ document.write(''); var sid="76IOF7"; var c=""; var b=""; BF_BB_SCRIPT=document.createElement('script'); BF_BB_SCRIPT.type="text/javascript"; BF_BB_SRC="http://buzzbox.buzzfeed.com/wd/BuzzBox?sid=" + sid + c + b + '&it=1&cb=' + (new Date()).getTime(); setTimeout(function() { document.getElementById('BF_BUZZBOX').appendChild(BF_BB_SCRIPT); BF_BB_SCRIPT.src=BF_BB_SRC; },1); })();