Bloomberg Bond View.
Last Thursday, August 18th, CFA Vancouver hosted a Bloomberg sponsored presentation by the Bank of Canada. Bloomberg presented some of their very impressive online analytic tools in addressing three areas of interest to all investors – Currencies, Commodities and Bonds.
Bloomberg was blunt regarding bonds. Here is a point form review of what their bond tools indicate.
U.S. bonds are at record low rates across the yield curve matching or lower than yields not seen since the lows of 2008. Recent GDP revision statistics show that the 2008 recession was deeper than first thought. Every other recession has had an inverted yield curve … except this one. And the U.S. has said it will keep short-term rates at or near zero for nearly two more years.
(Canadian Bonds are similar. Bank of Canada, bond charts show yields at all time lows across all maturities).
The U.S. is not moving out of recession as fast as hoped. Output is nowhere near its pre-recession level. And a feeble recovery is petering out. July year-over-year growth was merely 1.6%. (2009 was the first time nominal GDP growth went negative). The U.S. economy is at or very near stall speed.
There is continuing uncertainty over the U.S. fiscal mess. The spectre of higher taxes is keeping capital on the sidelines and this is impacting investment & hiring decisions. As a result, the market is no longer tied to economic fundamentals.
The message is very clear. The bond market is expecting more economic weakness like that seen over the last two years.
Bloomberg’s views while bleak are refreshing even sobering in comparison to the overly optimistic views from some Investment Managers.
What might this mean for Investors?
If Bloomberg is right, then the next year or two (as short-term interest rates stay low) will present value investors with opportunities to take their bond profits and rebalance into stocks.
Value investors might consider buy points like a target dividend yield (5-7%, say), or market P/E below 15x (15x trailing or 10-year average/smoothed earnings … not a forward-looking estimates based P/E which is at 12-13x), or simply more of the same … another correction that brings the S&P 5oo (down 17% since July 8th and down 18% from May to today) closer to 1,000 and the TSX (down 11% since July 22nd) closer to 11,000. Consider also, a buy point for foreign markets some of which are down 20% from their highs.Next time? Risk Management. Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan