I’m going to start this month with a prediction that might surprise you. I do not think that bonds are in imminent danger of a crash.
I do agree with the growing legion of investors—including the legendary Warren Buffett himself—who believe that the bond market is in a “bubble” of sorts. And I would certainly agree that at current yields, bonds have much greater downside potential than upside, making them quite risky. Nominal bond yields can’t fall below zero, after all, but they can rise significantly from here.
That said, I think this bubble might have a little longer to run, and this is good news for us. Even though we have no exposure to bonds in the Sizemore Investment Letter, we benefit from low yields as they make our income-oriented investments more attractive by comparison. Of course, I would expect the SIL’s recommendations to do at least relatively well in almost any interest rate environment, as most pay dividends that are both high and growing. Still, all else equal, I am quite happy to see rates stay low, and I think it is highly likely that they will.
Here’s why: Bubbles practically never crash when they are widely expected to. And right now, if there is one consensus in the world of investing, it is that the bond bull market is over. Take a look at the chart below. Fully 95% of money managers interviewed by Barron’s are either bearish or neutral on Treasuries! Continue Reading →