I would think most bond investors see treasuries as in a bubble. Even the lowest inflation predictions are higher than the current 1.28% yield on the 10-year maturity U.S. Treasury, and yet, the bubble is likely to persist until both 1) the Fed stops injecting $120 billion into the financial system and 2) the savings from trillions in stimulus payments are spent. There is simply too much money chasing too few assets.
The resulting pressure that is keeping short-term rates low compounds the problem as it encourages (to put it mildly) investors to “lever up.” Repo rates are as low as .20%, so why not borrow as much as you can?
With earnings strong and the support from the excess saving and the Fed’s printing press, corporate bonds continue to do well and have likely overshot what would normally be considered “fair value.” But given the fact bond investors have to face the reality of negative real returns in U.S. Treasuries, the demand for credit in bonds will continue at least through the end of the year. Granted, the uncertainty around the Delta variant will make for a few small bumps in the road, but barring a complete global shutdown, credit risk should be low.
Finding real returns with TIPS and sectors ETFs is still possible. BDRY benefits from rising shipping costs that will only spike further as Europe gains economic strength. GERM benefits from Delta variant fear and makes for a key diversifier in an investment portfolio. AWAY is linked to travel and is a good “buy the dip” option. Anything real estate-related other than office buildings still has room to run as well.
Word of caution: be ready to part with all the above in the latter half of next year as the economic rebound begins to run out of steam.
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