In a business that is known for its bad calls and its great calls, it's worth noting that we are witnessing history with one of the all-time worst calls. Investors have been wrong for so long in their attempts to call the bottom in rates that it has almost become a joke. I say almost because it's people's lives and livelihoods we're talking about. But time after time, for the past four years, attempts to proclaim the bursting of the bond bubble have proven to be early and costly.
"It seems like every six months we get the idea that we've reached escape velocity for the economy," explains Charlie Smith, CIO of Fort Pitt Capital. "And then we get a piece of bad news," and it reverses.
It has happened numerous times and the rationale is always the same: after a 30-year, generational run-up in bonds that brought rates to historical lows, the jig is up. Yet as Jim Bianco of Bianco Research recently noted, a 10-year analysis of rate predictions shows that when looking out just six months, the pros got it right only half the time but forecast higher rates 80% of the time. For the record, when that study began in 2002, the 10-year Treasury yield was 4.1%.
As Smith sees it, because of the Federal Reserve's stance (where it ''buffers collapse" and discourages risk-taking outside of financial assets), "We've ended up in this grinding, deflationary cycle where every six months we get an uptick, and then six months later we get a downtick."
As much as the stock market has, so far, delivered a great first quarter in the face of much adversity, Smith says reports depicting a "great rotation" out of bonds and into stocks are getting too much attention.
"We get hype that the bond bubble is going to burst, but the reality never measures up," Smith says, adding that he's currently neutral on the bond market.