At current yields, bonds represent certificates of confiscation, and bond holders face the likelihood of large capital losses.
I believe that, on a risk/reward basis, shorting fixed income is among the most attractive investment strategies in the year(s) ahead.
Bearish economic concerns are overblown. There will be no double-dip. Most indicators point toward a domestic economic growth rate that is moderating but also likely to be sustained.
The 2.60% yield on the 10-year U.S. note is discounting a double-dip. Over the course of the past 60 years, the 10-year note has yielded 365 basis points more than GDP growth. In other words, the fixed-income market is now discounting an unlikely 1% drop in GDP (2.60% less 3.65%).
Over the same time frame, the yield on the 10-year U.S. note has averaged about 300 basis points more than the inflation rate. While zero-interest-rate policy argues for a somewhat lower relationship, since the implied inflation rate in TIPS is about 1.6% now, this would imply that the yield on the 10-year U.S. note should be closer to 4.60%, or 200 basis points above the current reading.
in The Street.com
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