TRENDS & TAIL RISKS

A bi-weekly publication dedicated to the principle that deeper and broader knowledge drives superior investment results

Bond Market Clues

By Lewis Johnson | May 14, 2014

Investing wisely is challenging. But better information helps. Knowing is better than guessing!

When we train our new analysts we never fail to explain to them that investing is an exercise in decision making under uncertainty. The goal of our research is to try to limit uncertainty by increasing what we know, and decreasing what we don’t know. We have found over time that the market itself can be a source of very useful information – if we listen carefully and can understand its message. The chart below is just one example.


USGG30YR Index (US Govt 30 Year Bond Yields),

.30Y-TIPS Index (30 Year Real Interest Rates),

USGGBE30 (Market Inflation Expectation

US Government 30 Year Bond
Source: Bloomberg

By taking a deeper look; we can break apart the total yield on the US government 30 year bond (Chart: light blue data) into its two parts: 

  1.  The market’s estimate of the inflation rate (Chart: green data) and 
  2.  The resulting ‘real’ (after inflation) rate of interest (Chart: dark blue data).
We can solve for the market’s expectation for annualized real (inflation adjusted) growth over the duration of the bond simply by subtracting out this estimated inflation rate from the yield on the US government bond.

 

So what is the message of the markets right now? Slowing real growth…

Since late December the market’s estimate of real growth has fallen from 1.6% to nearly 1.0%. This may seem like a small amount but it is more than a 33% decline. That’s a big deal. What has the market seen that has it so concerned? Is it slowing growth in China or perhaps the slowdown underway in US housing? Could it be the inventory destocking cycle (more on this later) that we have long expected? Will this slowdown impact other markets as well? Time will tell. But one thing is certain: your investment team is always on the lookout for clues on how we can keep your money safe and to thoughtfully grow.

As always, we welcome your perspective and any feedback you have. •

 

CWA Asset Management Group, LLC is an SEC-registered investment adviser, doing business as Capital Wealth Advisors (“CWA”) and as blueharbor wealth advisors.  This material is for informational purposes only, as of the date indicated, is not complete, and is subject to change. Additional information is available upon request. Any opinions expressed herein represent current opinions as of the date of publication only and may change based on market or other conditions.  This material may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual results will not be materially different from those described here.   Certain information herein has been provided by and/or is based on third-party sources and, although believed to be reliable, has not been independently verified, and CWA is not responsible for third-party errors.  No representation is made with respect to the accuracy, completeness or timeliness of information or opinions herein and CWA assumes no obligation to update or revise such information or opinions.
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Lewis Johnson
Co-Chief Investment Officer

Author of Trends & Tail Risks

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