Daily Spotlight

Bond Prices Above Fair Value

Our proprietary Treasury Note Yield Model is signaling that 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 3.25%. The normal valuation range has a floor of 1.97% and a ceiling of 4.52%. The current 10-year bond yield is 2.40%, above the valuation floor but still below fair value. From an asset allocation standpoint, we think bonds remain fully valued compared to stocks and recommend fixed-income securities account for a relatively low 30%-35% of diversified portfolios Within fixed-income, investors have options ranging from government to corporate to foreign to asset-backed securities, among others. We favor U.S. Treasuries for the core of a portfolio. After a long narrowing in credit spreads, we no longer see more value in Corporate bonds than Treasuries, and now think investors should seek to supplement yield via securitized-debt securities. We would avoid foreign-government fixed-income securities. ...  a relatively low 30%-35% of diversified portfolios Within fixed-income, investors have options ranging from government to corporate to foreign to asset-backed securities, among others. We favor U.S. Treasuries for the core of a portfolio. After a long narrowing in credit spreads, we no longer see more value in Corporate bonds than Treasuries, and now think investors should seek to supplement yield via securitized-debt securities. We would avoid foreign-government fixed-income securities.    more

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