Now What for The Stock & Bond Markets?

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Bond Market Expectations in 2016...

Investors are Still More in Love with Bonds than Stocks

Why The Stock Market Is Riskier Than You Think...

Why Interest Rates Are Jumping...

The chart below shows us that the yield on the 10-year T-Note has gone from a low of 2.38% on October 8th to 3.45% as of Tuesday’s close. That's a yield spike of over +44%!

The primary reasons for the jump are as follows:


1. Economic reports, including consumer spending and retail sales have exceeded expectations.

2. Economic growth is projected to improve in 2011 thanks to persistent quantitative easing by the Fed and the almost certain extension of 2010's tax rates for the next two years.

3. As a consequence of 1. and 2. above, the risk of a double-dip recession is abating, a primary reason why rates have stayed so low for so long.

4. The less the likelihood of a double-dip recession, the less the risk of a deflationary malaise and the greater the likelihood of inflationary pressures.

5. And the less the likelihood of a double-dip, the greater the likelihood stocks will outperform bonds in 2011. As a result, hedge fund managers and savvy investors are selling bonds to buy stocks. And the stampede for the exits before year end is adding further fuel to the momentum. Thirty-year T-Bond yields are also on the rise...

Study: 2 Out of 3 Americans Flunk Finance Quiz...

Most Americans have an inadequate understanding of financial products and concepts, according to a new study conducted by Mathew Greenwald & Associates, Inc., Washington.

The research revealed that 69%! would receive a failing grade on a quiz about financial products and concepts.

When asked to rank the importance of understanding their own personal finances, 79% gave it a 7 or above on a scale of 1 (“What I don’t know won’t hurt me.”) to 10 (“I feel the need to know all I can about my financial situation.”).

Among the report’s other findings:

35% of respondents knew that the average rate of inflation is closer to 3% than 6% or 9%.

50% believed (incorrectly) that bonds offer the best protection against inflation compared to stocks.

32% knew that index funds seek to match the returns of stock or bond benchmarks, but 34% acknowledged they had no knowledge of how index funds work.

35% knew that money market funds are comprised of short-term investment vehicles.

27% realized that permanent life insurance can pay dividends.

49% believed (incorrectly) that term life insurance is more likely to have cash value than permanent life insurance.

57% thought annuities were only sold by banks.

61% thought Social Security funds are invested in the stock market!!!

44% did not realize they paid into Social Security!!!

High-Yield Bonds Continue To Outperform

Over the past month or so, the only area of the bond market that has done well is junk.

  

Both Treasuries and investment grade corporates have struggled, while high yield bonds have continued to surge.

Below we highlight a 6-month performance chart of the high yield bond ETF (HYG) and the investment grade corporate bond ETF (LQD).

As shown, HYG is up +18.2% over the last six months, while LQD is only up +5.5%.

You can see a clear split in performance (shaded in gray) at the start of December, where HYG continued to trade higher and LQD began to trade lower.

Chart and analysis courtesy of Bespoke Investment Group