Newsletter: What a Bursting Bond Bubble Looks Like
By Attain Capital
Our weekly newsletter is out, and this time we’re taking a look at the old standby of safety plays: bonds. You see, in the simplest terms, people tend to be motivated by two competing passions: greed and paranoia. When times are good, economists say that our interest-maximizing caveman brains urge us to try and get our hands on as large a slice of the resource pie as possible. However, when fortunes turn and times get tough, paranoia sets in as we try to protect every last scrap of what we’ve gained. It is this eternal psychological battle between gains and losses, risks and rewards, that shapes the markets we trade.
It’s also why so much is made of talking about risk compared to return, and it’s here that there has always been a demand for safe havens – places where people feel confident in the return OF their capital. And when it comes to safety in the last 30+ years, bonds have definitely been tough to beat. The long decline in rates (and corresponding increase in bond prices) has cemented the appearance of safety and stability. The current bond bull market has been underway for so long, it’s easy to forget that it hasn’t always been this way.
While we’re usually preoccupied with the Treasury bond bubble, our friends over at Welton Investment Corp. recently released an excellent paper as part of their Visual Insight series (click here to view the full piece) focusing on the corporate bond bubble. Like us, they’ve been wondering what the future holds for this “safe” refuge. In reality, that veneer of security is like the surface of a still pond… filled with piranhas. You see, bonds have historically had what Sean Kelly of The Samples called, “a dark side.” Just like the song, everything can be perfect and happy, right up until disaster strikes and a more somber note takes effect. Hand-wringing over our economic future is definitely not new, but in light of Welton’s work now seems like the perfect time to look beneath the placid surface to see what those murky depths contain.
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To read more Managed Futures research pieces, visit Attain’s Managed Futures Newsletter archive and our Managed Futures Blog.
DISCLAIMER
Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.
The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts.
The mention of asset class performance is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.) , and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices: such as survivorship and self reporting biases, and instant history.
Managed Futures Disclaimer:
Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.
Copyright © 2011 Attain Capital Management, licensed Managed Futures, Trading System & Commodity Brokers. All Rights Reserved. Reprinted with permission.
