Last Friday’s jobs report showed a noted decrease in hiring. It could be a sign that employers are becoming more cautious or it could just be a result of weather—time will tell for sure. One positive in the report was that lay-offs in the energy sector seem to be slowing down. Beyond the jobs report though, the fact remains that our economy is slowing and that should result in interest rates remaining lower for longer. As a result, we should see interest rates on US Treasury bonds continue to decline. And should that occur, it would mean additional profits in bond ETFs like Vanguard Extended Duration ETF (EDV) and iShares Barclays 20+ Year Treasury Bond ETF (TLT).
I have been a proponent of those bond ETFs for over 6 months now, even during the painful counter-trend move they made in February. They have been recovering and have now out-performed the S&P 500 over the last quarter, six-months and 1 year periods (through 1st quarter). Here is a chart of the S&P 500 versus those 2 bond ETFs (TLT and EDV) through 1st quarter year-to-date:
The S&P 500 spent most of January in negative territory, before turning positive for most of February and then drifting back to roughly even by the end of March. For the first quarter, the S&P 500 was only up +0.38%. The bond ETFs had a strong rally in January before correcting sharply when the jobs report in February was released. They then recovered in March. For the 1st Quarter, TLT posted a gain of 3.81% while EDV went up +5.08%. Granted, there was more volatility in bonds than the S&P 500 this past quarter, but in the end it resulted in those owning TLT earning 10 times more than the S&P 500 index. Those holding EDV earned over 13 times more than the S&P 500.
The Federal Reserve is up again today, so I expect more near-term volatility. But they have indicated that any increase in interest rates going forward will be dependent on the data. The year-over-year comparisons were favorable in the first quarter because of last-years number. Over the next two quarters, the previous year’s comparables should result in 2015 GDP numbers that disappoint to the downside. So I expect these bond ETFs to continue to outperform the S&P 500 over the next couple of quarters.
The underlying problem continues to be that economies all around the world are struggling with disinflationary pressures. Here in the US, we are relying on the actions of the Federal Reserve to try to prevent deflation and spur inflation. I believe, though, that the core issue is structural and will require a change in regulation and taxes. That will require a Congress that can get something done and a President that will sign it—neither of which seem very likely as all eyes are focused on posturing for the next election.
Jeff’s Trending Indicators
US Stock Market Trending DOWN
US Bond Yields Yields Trending DOWN (means prices go up)
Follow Jeff on Twitter: @JeffVoudrie
The author holds positions in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
