NEW YORK (TheStreet) -- Doug Kass of Seabreeze Partners is known for his accurate stock market calls and keen insights into the economy, which he shares with RealMoney Pro readers in his daily trading diary.
Among the posts this past week were items about why bond yields are continuing to trend lower, the uneven playing field for investors and the inquiry into Ocwen.
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Bond Yields Continue to Trend Lower
Originally published on Friday, April 25, at 7:38 a.m. EDT.
Despite some positive domestic economic releases, bond yields continue to trend lower this week -- the yield on the 10-year U.S. note is back down to 2.67% -- and the gap between rising P/E ratios and the market's message of future subpar domestic economic growth continues as well.
Several reasons why the (beginning-of-the-year) consensus expectations of rising fixed-income yields continue to be wrong include:
- Liability-driven pension plan buying.
- There is a developing correlation (over the near term) between rising bond prices (and lower yields) and declining equity prices. So if a stock market correction develops, bond prices will likely climb (and yields will likely continue to contract).
- Evidence that the important housing sector continues to pause and the continued ratcheting down of domestic economic growth forecasts for the first six months of 2014.
- Competition from surprisingly low European yields, as the European Central Bank considers the start of a broad-based asset purchases and other conventional and unconventional easing policies.
- Demographic trend support (as the maturing baby boomers seek the safety of income).
- The failure of trickle-down economics to support the stead of the middle class (who are still experiencing only modest income gains).
- Fear that accelerating inflation -- the CRB index is up 11% year-to-date -- will impede growth.
- Rising fear of geopolitical risk (now in the Ukraine) is putting a flight-to-quality bid under bond prices.
- Growing evidence that the recovery in the Japan and China's economies are more muted than previously expected.
While I continue to view shorting bonds as very attractive on an intermediate-term basis, the above headwinds represent a challenge to the thesis over the near term.