Boring Bonds Beat Sexy Stocks: Here’s Why

Bonds are supposed to be for conservative investors who are not willing to take on a lot of risk and don’t get freaked out by the daily market headlines. Professional fixed-income investors are data wonks happy to accept small returns over the long haul.

Stocks? They are what should give you the biggest bang for your buck. They’re sexy. But investors often overreact to news and tend to get a little too focused on the short-term. This 1986 hit by Janet Jackson might as well be the stock market’s theme song.

So you might be surprised to learn that bond investors and stock investors seem to have traded places like Eddie Murphy and Dan Aykroyd (yes, I’m a child of the 80s). Sleepy Treasury bonds are unexpectedly outperforming stocks by a pretty wide margin.

Just check out how the iShares 20+ Year Treasury Bond exchange traded fund (TLT), a popular proxy for long-term government bonds, has done compared to the S&P 500 (SPY).

What gives? Weren’t bond prices supposed to plunge and yields soar as the Federal Reserve started cutting, or tapering, its asset purchase program? Many experts predicted at the start of the year that there would be a so-called Great Rotation out of bonds and into stocks.

Treasury yields, which move in the opposite direction of prices, were expected to surge as investors dumped bonds. This had the makings of another bond bloodbath year like 1994. Yet, long-term rates are down this year and remain incredibly low.

The 10-year Treasury is nowhere near the 3.4% level that strategists surveyed by CNNMoney predicted back in January.

I think the bond bonanza is a sign that the market still doesn’t believe the stock rally is for real.

There are so many concerns about how a correction, or worse, is around the corner. Thursday’s big stock market sell-off is a reflection of these jitters.

CNNMoney’s Fear and Greed Index, which looks at the VIX (VIX) volatility gauge and six other indicators of sentiment, is now in Extreme Fear mode. It’s a bit of a shock since the Dow and S&P 500 aren’t that far from all-time highs.

But it goes to show that more investors seem to be nervous about a possible crash than excited about the prospect of stocks going even higher. One of the seven indicators looks at safe haven demand, which is showing that the recent performance of stocks versus bonds is the weakest in about two years.

Low long-term Treasury rates also seem to be an indication that the bond market thinks the economy is still just limping along. If the economy was really heating up and inflation was really a serious risk, rates would probably be much higher than they are now.

But when you combine the 4% GDP growth from the second quarter with the weather-induced decline of 2.1% in the first, you’re left with an economy that’s still growing a a mere 2%-ish clip.

And all the recent geopolitical turmoil (Ukraine-Russia, Israel-Gaza, Argentina default, Portuguese banking crisis, etc.) may be steering more foreign capital to the security of U.S. bonds. China and Japan continue to be big buyers of U.S. debt after all.

Consider that gold, another safe haven asset in tumultuous times, has also done well this year. The SPDR Gold Shares Trust (GLD) ETF is up slightly more than the broader market.

Now I still don’t think the market is about to crash — even though this could be the beginning of a much-needed correction.

But the sizzling performance of the supposedly staid bond market should not be ignored. It shows that the economy still isn’t close to being fully recovered — and that stocks aren’t the only game in town for investors. Bond investors can enjoy double-digit returns every now and then too.



Follow

Get every new post delivered to your Inbox.

Join 860 other followers