There's No "Bubble" in Bonds ... or Gold, John Roque Says

Bond prices fell early Friday after the downward revision to second-quarter GDP wasn't as bad as feared. Still, Treasury yields (which move in the opposite direction of price) aren't far above the lows hit in March 2009, leading to a lot of talk about a "bubble" in bonds. (See: Bullish a Year Ago, Robert Prechter Now Sees "the Biggest Bubble in History")

But "it's hard for me to imagine there's a bubble in an item that is not an all-time high,"  says John Roque, managing director at WJB Capital Group, who notes the Nikkei, the Nasdaq, housing, financials in 2007 and energy in the 1980s each hit record highs before those bubbles burst. 

"If...if there's a chance this is reminiscent of a bubble, normally the last phase is most dramatic...I don't think we've achieved that the phase of greatest accelerating if yields aren't at all-time lows."

How low can they go? The all-time low yield on the 10-year was 1.67% in 1945, or roughly 33% below today's "ultra-low" levels.

Roque isn't forecasting a return to those thrilling days of yesteryear but notes the 10-year yield (at just above 2.50%) is currently higher than its most recent low of 2.2%, hit in the fall of 2008.

The Long Bubble

Furthermore, yields on long-term Japanese Government Bonds (JGBs) have been below 2% since the late 1990s, the technician notes. "It's not necessarily so that yields have to go lower, it's just that they don't have to go higher."

As was the case with JGBs in the late 1990s, there's been heavy interest in shorting Treasuries as many investors have fought the rally amid fears of inflation and, yes, widespread talk of bond bubbles. "If they hated it before, they must really hate it now," Roque says of the bond bears.

"My guess is the fact demand for Treasuries is so high just says investors want their money back," he continues. "The lack of trust in equities is going to be pervasive for some length of time."

The same dynamic applies to gold, Roque notes. Gold has averaged 1.5 times the price of the S&P 500 for the past 80 years and peaked at a relative value of 4.5 times the index, according to Roque. In the current cycle, gold's relative value to the S&P peaked at 1.4 times.

"We don't live in reversion to the mean world, we live in a revision beyond the mean world," he says. "So pick a number - but I think it's going to be higher than 1.5."

As detailed here, Roque's current target for the S&P 500 is 950. Based on that, he says $1900 is a "fair target" for gold, assuming it trades at least 2 times the price of the index.

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