Is There Still Room to Run in Treasury Bonds?


Treasury bonds are among the best-performing assets this year to date. If you look at the iShares Barclays 20+ Year Treasury Bond ETF (NYSEARCA:TLT), you’ll find that it has risen over 11 percent for the year. This is despite the fact that the fund hit a multiyear low at the end of 2013 and the fact that investors were unanimously bearish on Treasury bonds at the beginning of the year.

With the rise we have seen in bonds so far this year, we have seen some analysts come out with bullish remarks on the Treasury market, but still, the prevailing viewpoint is that rates are going to rise going forward. Furthermore, this viewpoint is presented as axiomatic. Consider, for example, this article from Fidelity. The language implies that interest rates must rise.

But while this may be true, the fact that this is the prevailing viewpoint means that, from a contrarian standpoint, the best bet to make for the shorter term is that rates will fall and that long-dated Treasury bonds will rise in price.

This has been a difficult trade to make because it doesn’t make any fundamental sense. The supply of bonds is increasing and demand for bonds is decreasing on many fronts: the Chinese, Japanese, and the Federal Reserve are all reducing their demand for bonds. In fact, the only source of new demand that is readily visible is from Belgium.