In economic uncertainty, the smart money flees stocks and heads to bonds until the storm is over. There’s nothing wrong with not participating in a volatile market. Being risk oriented is often a poor decision for everyone but the most experienced traders. Still, I’m not convinced that treasury bonds are the right place to be. In my opinion, all the signs point to an upcoming selloff in the treasury bond market.
Here are some reasons why it’s wise to be cautious about treasuries now.
1. Shorting Treasuries
I’m not a fan of short selling anything. Short trades are notoriously risky, and in my opinion, a lot harder to analyze, enter, and exit than long positions. Even Nassim Nicholas Taleb, author of “Fooled by Randomness” and “Black Swan,” said that every single human being should be short treasuries.
Clearly, Taleb and other fund managers are concerned about the high level of debt, inflation, and the low Federal Reserve interest rate, three factors which together contribute to his belief that shorting treasuries is a ‘no brainer.’
2. The Thirty-Year Bond Cycle
Historically, bonds reach a bubble every thirty years. We’re currently a few years past the end of the cycle, which would indicate a bubble ready to pop. This was recently discussed in a SeekingAlpha article.
3. Economic Uncertainty
As I discussed in the introduction, in economic uncertainty, treasuries are an excellent place to be. As economic certainty returns, it makes sense that the bond market will suffer. The price of treasuries, like gold, reflects the fear in the market. I can’t imagine the market uncertainty being higher in five or ten years than it is right now.
Conclusion
Unless you’re getting close to retirement age, buying treasuries is a bet against the market, and the market is made by growth and earnings. So long as businesses continue making money, betting against the market is a bad idea. If you’re still in bonds, consider selling them and finding some safe businesses with room for growth, like Wal-Mart Mexico (WMMVY).
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