First, let's review the markets:
For the week ending on 5/20/2011, the notable developements among major assets include:
- Commodities (DBC) have stabilized: it is still ranked in third place though it lost 7.4% in the last 4 weeks.
- Gold (GLD) as a special asset held up well. Silver (SLV) also stabilized.
- U.S. stocks stablized (VTI) while international stocks (EFA) continued to display weakness (-2.6% in the last 4 weeks).
- The most noticeable: long term treasury bonds (TLT) had positive return in the last 1, 4, 13, 26 and 52 weeks.
- Dollar is still somewhat strong: U.S. dollar bearish ETF (UDN) lost 1.33% in the 4 weeks (ending on 5/18/2011).
To summarize, the recent gyration of commodity prices has not very much changed the asset trend ranking. For more information, please refer to here.
Investors should pay close attention to long term treasury bonds (TLT): with QE2 ending, it began to show its strength, contrary to popular belief. PIMCO's Bill Gross came out to say that PIMCO was never short treasuries, as confirmed by our SmartMoneyIQ tool. See a recent SeekingAlpha article for more detail.
When long term treasury bonds had strong upward movement in the past, it fell into the following situations (not necessarily non overlapped)
- The economy deteriorated: flight to safety started from the fixed income sector (fixed income investors first were usually the most sensitive ones). This happened throughout late 2007, to the Lehman Brothers collapse in September 2008. However, this should be confirmed with other indicators such as widening the credit spread (or so called TED spread, see here). At the moment, the credit spread narrowed a bit from its recent high.
- Indication of another round of loose monetary policy. Though we are near the end of QE2, the FED made it explicitly clear that it is still worried about the economy and will do whatever it takes to stimulate again (if necessary), at least that seems to be the public interpretation now.
- Deflation threat reared its ugly head: the long term rate reached the highest in January 2000, and started to fall since then. That was the beginning of the internet bubble bursting and Greenspan's aggressive rate cut.
- The suplus countries like China and Japan aggressively purchased the U.S. treasuries to fix up their currencies. This does not look like a strong reason this time around as those countries are under pressure to re-balance their global trades and domestic economies.
For a tactical asset allocation strategy that looks at the trend scores of various risk and fixed income assets, the long term bond ETF (IEF) performance is important. At the moment, IEF's trend score has risen from the bottom to a top position among fixed income ETFs (see the following table). If risk assets fall rapidly, it is possible that the treasury bonds ETF (IEF, TLT) can surpass the risk assets rankings. For now, the situation warrants closer scrutiny.
| Assets Class | Symbols | 05/20 Trend Score | 05/13 Trend Score | Direction |
|---|---|---|---|---|
| International REITs | RWX | 10.82% | 8.79% | ^ |
| US Equity REITs | VNQ | 10.41% | 8.68% | ^ |
| Commodities | DBC | 10.32% | 7.93% | ^ |
| Gold | GLD | 10.06% | 8.12% | ^ |
| US Stocks | VTI | 8.23% | 7.97% | ^ |
| Emerging Market Stks | VWO | 6.72% | 4.9% | ^ |
| US High Yield Bonds | JNK | 6.37% | 5.6% | ^ |
| International Developed Stks | EFA | 5.23% | 5.27% | v |
| International Treasury Bonds | BWX | 4.66% | 4.88% | v |
| Frontier Market Stks | FRN | 4.27% | 3.49% | ^ |
| Emerging Mkt Bonds | PCY | 4.27% | 3.48% | ^ |
| US Credit Bonds | CFT | 2.81% | 2.79% | ^ |
| Intermediate Treasuries | IEF | 2.39% | 2.4% | v |
| Municipal Bonds | MUB | 2.0% | 2.31% | v |
| Total US Bonds | BND | 1.92% | 2.02% | v |
| Mortgage Back Bonds | MBB | 1.8% | 1.89% | v |
| Treasury Bills | SHV | 0.02% | 0.07% | v |
The trend score is defined as the average of 1,4,13,26 and 52 week total returns (including dividend reinvested).
Whatever the possible reasons behind the recent strength of long term treasuries, investors should monitor this closely. It also doesn't help that we are now entering a seasonally weak period for risk assets: "Sell in May and Go Away".
Disclosure: I am long DBC, IYR, HYG, TLT.
