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The Bubble In Fixed Income at Trader’s Narrative




The Bubble In Fixed Income


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We have a rare Michael Belkin sighting! You’re forgiven if you have no idea who that is. Belkin is an independent market analyst and the author of his eponymous weekly report targeted to institutional investors (or anyone with a large enough portfolio). He used to work at Salomon Bros. before hanging his shingle in Bainbridge Island, about as far away from Wall Street as you can get. The last time I checked he charges $36,000 a year for his expertise.

The distance and the ocean air must help because Belkin has an enviable record. During the last market cycle he called the bubble and the ensuing crash. He then he caught the 2003 bottom for a nice ride higher again. Belkin turned bearish a bit too early, in October 2003, but after a string of calls like that you can’t hold that against him.

Recently he was interviewed at Welling@Weeden, a subscription site which itself costs about $5000/year (for those who can’t soft dollar it). Barry Ritholtz kindly shared an excerpt of Belkin’s interview:

Where my views are probably different than what some of the higher profile names are currently saying is that I’m not pointing to the equity market now as the source of a bubble or of malinvestment, in Austrian terms.

If not the stock market, where are you pointing?

At the bond market. Specifically, since the March 20, 2009 turning point in the equities market, if you look at the AMG weekly data on inflows into ETFs and mutual funds,bond fund flows have been positive every week and have averaged $4 billion a week. There hasn’t been a single down week. But meanwhile, for equities funds, there’s been a completely different pattern. They’ve been down two weeks, up one week, then down, up four weeks, down five weeks —and the average inflow is only $500 million a week.

Just barely positive?

Yes, at last count only $24 billion had gone into all kinds of equities funds over this entire recovery rally, versus $178 billion into bond funds. I’ve been looking at this for quite a while and sort of scratching my head and wondering what was going on. But finally it just occurred to me. They’re buying bonds. It’s rather obvious. I think what has happened is that the the public in previous cycles bought emerging market funds or internet stocks or whatever, when the Fed would lower interest rates to an artificially low level, thereby penalizing people on their savings. So right now, for instance, I have friends who inherited a lot of money and I’m an informal advisor to them, not a paid advisor. They keep asking me, what do I do now? They were investing in CDs, that were parceled out to a lot of different banks on which they were making 2, 3, 4%. But now they’re maturing and the banks are offering, like, nothing. So they are asking, what do we do, what do we do? They need the yield; they need income; they don’t want to lose the nominal principal. What to do? What to do?

True to form, Belkin is pointing to the fixed income market as the location of the next Fed induced bubble. For the handful of persevering readers of this blog this isn’t anything new. We’ve already looked at the enormous shift that has taken place in the mutual fund world where the vast majority of money being put to work is going into fixed income funds. As well, I’ve already explained why I think that today’s bond investors will be sorely disappointed. Also, consider the sky high bond fund liquidity compared to equity funds.

I chuckled reading Belkin’s last comments because I’ve been there. I have family and friends ask me the same question. They don’t want to go back into the equity market and they really need steady yield or income from their investments (which dividend yields do not provide). Up until recently I was suggesting Canadian REITs. But these rock solid investments are now just too expensive for my taste. And the bond market? Wading into fixed income here would be like obliviously picking up coins in front of an incoming road-roller.

If that doesn’t convince you, then here’s a report from James Montier (when he was at Societe Generale). The report below is from last year and things have gotten even more lopsided since.

The take away then is that the equity market is not forming a bubble. I know we have been habituated by the incessant machinations of the Federal Reserve to be constantly on guard against bubbles. Traders and investors now jump at their own shadows for fear that it is a bubble. But nevertheless I find it hard to argue against the evidence that what we are seeing in the stock market is not a bubble in the least, especially when we consider the bond market.


road roller and bond investors

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7 Responses to “The Bubble In Fixed Income”  

  1. 1 skj

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    Do you think all of fixed income is in bubble territory or some specific parts of it like the high yield/MBS sectors?

  2. 2 Mike C

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    This is a tricky call. I’m inclined to think there is a “bubble” in fixed-income or at the very least bonds are very overpriced here. That said, there are some very smart people on the other side of this. See Van Hoisington and Lacy Hunt and Rosenberg. There is a plausible case to be made that the issue over the next 3-5 years is deflation due to the collapse in credit, not inflation. Even Hussman says inflation won’t be the issue until the 2nd half of this decade. Bonds could continue to do well for another couple of years.

  3. 3 Jim

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    The new national sport, bubble watching!!!! Is China a bubble, the bond market, here a bubble, there a bubble, everywhere a bubble. I suspect the next bubble will sneak up on us and won’t be so obvious.

  4. 4 Samuel

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    Hard to believe there is a bubble in US Treasuries when it is the most despised asset class on Wall Street with only 4% of money managers bullish on them. The whole world expects interest rates to rise significantly here.

  5. 5 Babak

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    Taleb is saying that everyone should be shorting Treasuries and that it is a no brainer - yikes!

  6. 6 Nick

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    Going back to SKJ’s original question, are treasuries the only major risk, or do corporates and munis appear to be in bubble territory?

  7. 7 jtechkid

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    If you look at the last 20 years when you saw a panic buying of mutual fund government bond funds the interesting play is the following year was a blockbuster for the stock market.

    The biggest rate of change Buying into Government bond funds 2009, 2002, 1998, 1993. The interesting point is this usually put a bottom on equities and basicly gave you the best returns in stocks verse bonds. Conversely, The biggest selling of Government bond funds from retail investors was 2000 and if you took other side of that trade you did great.

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