The S&P 500 Dow industrials and Nasdaq Composite closed at records Tuesday. The S&P 500 and Nasdaq have closed at records every trading session of 2018. Thus far, the strength in the U.S. has found global equities on the rise. At these global equity levels bearish bets on the market are on the rise…akin to what might be on the way for bond yields.
Legendary bond investor Bill Gross offered Tuesday that, “The bond bear market is finally upon us after more than 25 years. Bond bear market confirmed today. 25 year long-term trend lines broken in 5 (year) and 10 (year) maturity Treasuries.”
I wouldn’t be too quick to draw conclusions from the latest surge in bond yields as we’ve seen this before and it proved to be nothing more than a “head fake” as yields retreated from their highs in March 2017. While Gross is largely considered a bond guru, his career took off during the 80s and when yields were spirited through an inflationary cycle that has produced an elongated 30+ year bull market for bonds. In other words, bonds yields had nowhere to go but down, making Gross’ reputation largely a factor of fortunate timing of significant and anomalistic inflation participation. That’s a tough sentence structure to swallow, but feel free to read up on the bond king.
Jeff Gundlach also chimed in yesterday via Bloomberg and as it relates to market predictions. The touted bond investor says that he expects markets to end in the red for the year with the S&P 500 gaining some 15% in the early part of the year. The DoubleLine Total Return Bond Fund, his biggest fund, returned 3.8 percent last year, better than 80 percent of its peers, according to data compiled by Bloomberg. The fund mostly focuses on mortgages.
Gundlach also said during the webcast that commodities might be one of the best investments this year. Keep in mind that Gundlach also stated in December of 2016 that the Trump Trade was over and that investors should bet against the S&P 500 in May of 2017. Both calls would have found investors missing the bull market that persisted through all of 2017.
For every view on the bond market there is a natural oppositional perspective and famed investor Bill Miller discussed his perspective on rising yields yesterday. In an interview on CNBC yesterday, the famed investor suggested that equity markets could rise by as much as 30% if yields rise further. Miller cited 2013 as an example for his bullish sentiment on the equity markets.
Those 10-year yields go through 2.6% and head towards 3%, I think we could have the kind of a melt-up we had in 2013, where we had the market go up 30%,” Miller said. In 2013, investors began to lose money in bonds, prompting them to take money out of bond funds and put it into equity funds, he said. Yields rise as Treasury prices fall.
While the viewpoints of Gross and Miller can actually coexist in the marketplace, with bond yields rising alongside appreciating equity prices, it’s a rarity. By and large, the most productive investor takeaway is possibly to focus on causation rather than forecasting conclusions. What may cause equities and bond yields to rise or fall? For now, we may look to the Japanese market for clues as JGB yields built on Tuesday’s gain after the Bank of Japan trimmed its purchases of longer-dated bonds. The adverse affect has caused a steep decline in the USD/JPY correlation. It’s always something!
Either way or more compelling near term may be the opposing views on the market juxtaposed with current equity market and volatility. Arguably, the equity markets could withstand a healthy pullback and an increase in volatility. Such an occurrence would not only justify the more recent and rapid moves to the upside for equity markets and normalize expectations for 2018. And we may be on the doorsteps of such a pullback given the U.S. equity futures today. Equity futures are decisively lower presently with the VIX slightly higher, but VIX Futures or implied volatility catching strong bids higher. VIX Futures term structure has softened a bit with contango falling to roughly 9 percent and ahead of next week’s expiration.