Analysis About Treasuries on CNBC Superficial as Usual

I have been listening to CNBC today and there have been numerous discussions about a US Treasury bubble. Most of the conversations focus on the low yield of bonds and how an investor can find more yield elsewhere (e.g. solid companies with good dividends). They also talk about valuations of stocks and bonds with bond values somehow being markedly overvalued (although I did hear one argument that the real = inflation adjusted return of the 10-year bond is reasonable and not overvalued). Wharton professor Jeremy Siegal even piped in as a bond bear just now. The rationale is that when there is inevitable inflation, the yields will go up fast, and the value of bonds/bond funds will crater, providing a nasty surprise to retail investors who have a tendency to pile into asset classes at absolutely the wrong time.

While it is important for those piling into bond funds to realize the potential downside risk (not a safe haven by any means), I think this is one of the worst discussions that I have ever heard because all these analysts are missing the point. The trend in Treasury prices is higher until the trend is broken. There was a clear change in the long bond chart price trend at the end of winter/early spring that I used as a signal to overweight bonds in my portfolio. In this sense it is no different than holding a fast moving stock. You don't necessarily sell it as long as the trend remains favorable. Those who followed this trend are up about 10% in just a few months, so the yield is completely irrelevant to the thesis upon which I overweighted bonds i.e. I sought opportunity for a capital gain by buying the long bond ETF (TLT) when I saw a break out in the chart.

So all the caveats apply here too--what goes up fast can go down faster in value. I would even add that bonds are due for a breather and a steep correction, so maybe it is not the right time to jump into this asset class. Several smart money investors that I do admire have clipped their longer dated treasury positions on strength this week. However, there is very little risk of inflation in the short term. The two key components of inflation are absent i.e. the money supply has been shrinking and monetary velocity is abysmal. These are the ingredients of short term deflation not inflation. The direction of the economy over the next 6 months should provide clues to whether we are in a Treasury bubble or whether we are just at the beginning of a new up leg in a 25 year bull market for this asset class. If the economy stalls further, you will not see inflation of any significance.

I will not profess to know whether we will have inflation or deflation in 5 years, but anyone who thinks Treasury yields can't go lower because they are already at historic lows seems to have missed the news in August that the yield on Japan's ten year bond is below 1%. Japan has structural deficits and debt much greater than in the U.S., and, yet, inflation has been nowhere to be seen for decades. Just keep that in mind the next time someone tells you there is a U.S. Treasury bubble....maybe, but maybe not...