The S&P 500 is above 1500. CBOE S&P 500 Volatility is sitting near 15-year lows. And 88 per cent of iShares S&P 100 component stocks are above respective 200-day moving averages.
Normally, you might hear more discussion about complacency and/or an imminent selloff. Instead, you’re hearing more about the “Great Rotation” out of bonds and into stocks. In fact, if Laszlo Birinyi or Jeremy Siegel have your ear, we’ve just barely begun an exuberant stage for equities.
Bullish prognosticators certainly do have a mound of evidence to fall back on. Consider the iShares 20-Year Treasury Bond Fund. Its current price is well below short- and long-term trendlines. And the 50-day recently crossed below the 200-day ... a price movement pattern known as a “death cross.” (Note: The last “death cross” for TLT occurred more than two years ago.)
It may be reasonable to agree that long-term Treasuries are facing hardship. Or perhaps ... the potential rewards of owning TLT over the next year (e.g., yield, capital appreciation, perceived safety, etc.) are not commensurate with the possible risks (e.g., loss of principal, excessive volatility, etc.).
On the other hand, it may be a bit nearsighted to dismiss the entire community of debt instruments. For example, over the past three months, the S&P 500 SPDR Trust has put together 5.5 per cent. The fiscal cliff impasse kept the market range-bound for a period of time, but the market has since gone on to hit a five-year peak; similarly, TLT has logged a dismal 3.1 per cent decline.
Nevertheless, a wide range of bonds has provided admirable risk-adjusted returns over the period. SPDR Convertible Bonds garnered 4.1 per cent, iShares High Yield Corporate registered 2.2 per cent, SPDR Barclay Emerging Market Local Bond amassed 1.9 per cent and Market Vectors High Yield Muni served up a tax-free 1.3 per cent.
3-Month Total Returns For A Wide Range Of Bond ETFs
SPDR Barclays Convertible Bond (CWB)
4.1 per cent
Peritus High Yield (HYLD)
2.6 per cent
iShares High Yield Corporate (HYG)
2.2 per cent
SPDR Barclays EM Local Bond (EBND)
1.9 per cent
PIMCO 0-5 ST High Yield (HYS)
1.7 per cent
PowerShares Senior Loan (BKLN)
1.6 per cent
Market Vectors High Yield Muni (HYD)
1.3 per cent
Vanguard Extended Duration (EDV)
-4.9 per cent
iShares 20+ Year Treasury (TLT)
-3.1 per cent
SPDR Barclays International Treasury (BWX)
-1.4 per cent
Vanguard Long-Term Bond (BLV)
-1.0 per cent
iShares 7-10 Year Treasury (IEF)
-1.0 per cent
Vanguard Total Bond (BND)
-0.5 per cent
PowerShares Build America Bond (BAB)
-0.4 per cent
Granted, if a steady stream of outflows from intermediate– and long-term Treasuries turns into a stampede, higher Treasury yields may put pressure on other fixed-income vehicles. Indeed, if we witness a full-fledged exodus at a pace that the Federal Reserve isn’t able to offset through its quantitative easing policies, stock investors might also find themselves struggling with a sharp uptick in the 10-year. After all, most of the country’s mortgage and car loan euphoria is dependent on subdued five-, seven- and 10-year notes.
As of this moment, however, iShares 7-10 Year Treasury has not entirely thrown in the towel. For the better part of nine months, it has traded in a fairly stable range.
It follows that a slow rotation out of lower-yielding Treasuries might be manageable and moderately bullish. Conversely, a rapid-fire rotation would likely bring bears back to the dance floor.
Regardless of how it ultimately plays out, it’s important to recognize that not all bond ETFs are cut from the same cloth. I maintain a healthy allocation to emerging market bonds, short-term high yield bonds as well as munis in taxable accounts.
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