Daily Spotlight

Bonds Remain Overvalued

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 3.40%. The normal valuation range has a floor of 2.1% and a ceiling of 4.7%. The current 10-year bond yield is around 1.59%, below the low end of the fundamental range and far below fair value. From an asset allocation standpoint, we think bonds remain fully valued compared to stocks and recommend that investors under-weight fixed-income securities in their diversified portfolios (our base asset allocation model has a 40% weight to bonds). 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. In the wake of a recent narrowing in credit spreads, we no longer see value in high-rated Corporates but prefer asset-backed securities. We would avoid foreign-government fixed-income securities, many of which now carry negative yields. ...  1.59%, below the low end of the fundamental range and far below fair value. From an asset allocation standpoint, we think bonds remain fully valued compared to stocks and recommend that investors under-weight fixed-income securities in their diversified portfolios (our base asset allocation model has a 40% weight to bonds). 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. In the wake of a recent narrowing in credit spreads, we no longer see value in high-rated Corporates but prefer asset-backed securities. We would avoid foreign-government fixed-income securities, many of which now carry negative yields.   more

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