Daily Spotlight

Bonds Overvalued

Our proprietary Treasury Note Yield Model is signaling bond yields are too low and prices too high. Our model discounts factors such as current yields, GDP growth and long-term inflation, as well as stock prices and earnings. We smooth trends out over a five-year period in order to avoid being caught in short-term momentum swings. Our current 10-year T-bond fair value yield is 2.89%. The normal valuation range has a floor of 1.60% and a ceiling of 4.20%. The current 10-year bond yield is around 1.69%. From an asset-allocation standpoint, we think bonds remain fully valued compared to stocks and recommend fixed-income securities account for a relatively low 25%-30% of diversified portfolios. Within fixed-income, investors have many options. We currently favor U.S. Treasuries for the core of a portfolio. After a long narrowing in credit spreads, we would underweight corporate bonds and add to securitized-debt securities. We would continue to avoid foreign-government fixed-income securities. Many of the sovereigns are trading at negative yields and the trend of negative yields seems likely to continue for the near future. In terms of duration, we continue to favor the intermediate-term; employing a laddered strategy should allow proceeds from matured bonds to be reinvested at current rates. ...  From an asset-allocation standpoint, we think bonds remain fully valued compared to stocks and recommend fixed-income securities account for a relatively low 25%-30% of diversified portfolios. Within fixed-income, investors have many options. We currently favor U.S. Treasuries for the core of a portfolio. After a long narrowing in credit spreads, we would underweight corporate bonds and add to securitized-debt securities. We would continue to avoid foreign-government fixed-income securities. Many of the sovereigns are trading at negative yields and the trend of negative yields seems likely to continue for the near future. In terms of duration, we continue to favor the intermediate-term; employing a laddered strategy should allow proceeds from matured bonds to be reinvested at current rates.   more

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