The S&P 500 is above 1500. CBOE S&P 500 Volatility (VIX) is sitting near 15-year lows. And 88% of iShares S&P 100 (OEF) component stocks are above respective 200-day moving averages.
Normally, you might hear more discussion about complacency and/or an imminent sell-off. Instead, you’re hearing more about the “Great Rotation” out of bonds and into stocks. In fact, if Laszlo Birinyi or Jeremy Siegel have your ear, we’ve just barely begun an exuberant stage for equities.
Bullish prognosticators certainly do have a mound of evidence to fall back on. Consider the iShares 20-Year Treasury Bond Fund (TLT). Its current price is well below short and long-term trendlines. And the 50-day recently crossed below the 200-day… a price movement pattern that goes by the name, “Death Cross.” (Note: The last “death cross” for TLT occurred over 2-years ago.)
It may be reasonable to agree that long-term treasuries are facing hardship. Or perhaps… the potential rewards of owning TLT over the next year (e.g., yield, capital appreciation, perceived safety, etc.) are not commensurate with the possible risks (e.g., loss of principal, excessive volatility, etc.).
On the other hand, it may be a bit near-sighted to dismiss the entire community of debt instruments. For example, over the past 3 months, the S&P 500 SPDR Trust (SPY) has put together 5.5%. The fiscal cliff impasse kept the market range-bound for a period of time, but the market has since gone on to hit a 5-year peak; similarly, TLT has logged a dismal -3.1%.
Nevertheless, a wide range of bonds have provided admirable risk-adjusted returns over the period. SPDR Convertible Bonds (CWB) garnered 4.1%, iShares High Yield Corporate (HYG) registered 2.2%, SPDR Barclay Emerging Market Local Bond (EBND) amassed 1.9% and Market Vectors High Yield Muni (HYD) served up a tax-free 1.3%.
|3-Month Total Returns For A Wide Range Of Bond ETFs||¬†|
|SPDR Barclays Convertible Bond (CWB)||¬†||¬†||4.1%|
|Peritus High Yield (HYLD)||¬†||¬†||¬†||2.6%|
|iShares High Yield Corporate (HYG)||¬†||¬†||2.2%|
|SPDR Barclays EM Local Bond (EBND)||¬†||¬†||1.9%|
|PIMCO 0-5 ST High Yield (HYS)||¬†||¬†||1.7%|
|PowerShares Senior Loan (BKLN)||¬†||¬†||1.6%|
|Market Vectors High Yield Muni (HYD)||¬†||¬†||1.3%|
|Vanguard Extended Duration (EDV)||¬†||¬†||-4.9%|
|iShares 20+ Year Treasury (TLT)||¬†||¬†||-3.1%|
|SPDR Barclays International Treasury (BWX)||¬†||-1.4%|
|Vanguard Long-Term Bond (BLV)||¬†||¬†||-1.0%|
|iShares 7-10 Year Treasury (IEF)||¬†||¬†||-1.0%|
|Vanguard Total Bond (BND)||¬†||¬†||¬†||-0.5%|
|PowerShares Build America Bond (BAB)||¬†||¬†||-0.4%|
Granted, if a steady stream of outflows from intermediate- and long-term treasuries turns into a stampede, higher treasury yields may put pressure on other fixed income vehicles. Indeed, if we witness a full-fledged exodus at a pace that the Federal Reserve isn’t able to offset through its quantitative easing policies, stock investors might also find themselves struggling with a sharp uptick in the 10-year. After all, most of the country’s mortgage and car loan euphoria is dependent on subdued 5, 7 and 10-year notes.
As of this moment, however, iShares 7-10 Year Treasury (IEF) has not entirely thrown in the towel. For the better part of 9 months, it has traded in a fairly stable range.
It follows that a slow rotation out of lower-yielding treasuries might be manageable and moderately bullish. Conversely, a rapid-fire rotation would likely bring bears back to the dance floor.
Regardless of how it ultimately plays out, it’s important to recognize that not all Bond ETFs are cut from the same cloth. I maintain a healthy allocation to emerging market bonds, short-term high yield bonds as well as munis in taxable accounts.