UBS: Mark Your Calendars, September 22, 2011 Was A Historic Turning Point In The Market

From UBS economist Larry Hatheway:

September 22nd 2011. Mark that date in your calendars. That is the day the secular bear market in US Treasuries began. On that date, 10-year Treasury yields made their lows of 1.72%. From there, we believe it’s higher for longer.

So why is the bond bear market officially here?

Hatheway lists 5 reasons

  • The US is transitioning into sustainable recovery mode.
  • Credit flow is improving, and turning positive again.
  • The consensus that QE3 is coming is now starting to crack.
  • China is going to strengthen again in the second half.
  • The European recession will not be as bad as feared.

As for the equity implications, Hatheway writes:

If we are right, bond yields are beginning a long march higher. However, it is wrong to see rising yields as an automatic threat to global equity markets. Rather, global equities can continue to advance if stronger and more sustainable growth is behind the rise in yields. To be sure, given their strong performance over the past four months, the pace of equity advance for the remainder of this year is
likely to be more subdued. Still, stocks should out-perform bonds even from here. That’s how we are already positioned and we maintain that view.

Still, some changes in the model portfolio are warranted. As bond yields rise, it is appropriate to trim allocations to both investment-grade and hard currency emerging market debt (we are already heavily underweight nominal and inflation-linked government bonds). We prefer instead increased allocations to shorter duration high-yield corporate bonds and local currency emerging debt markets. 

Here’s a look at 10-year Treasury rates going back to September 1, 2011, just before that bottom.


Photo: FRED

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