Treasury Bonds Continue to Outperform, Are you Long?

07/23/2019 10:11 am EST


Landon Whaley

Editor, Gravitational Edge

Long Treasury bonds and notes has been the most reliable trade in 2019, points out Landon Whaley.

Boy, do we humans like to complicate things.

Three television channels weren’t enough for us, so now we’ve got 800, and there is nothing to watch. Two types of coffee (black or with varying levels of cream and sugar) weren’t enough for us, so now we’re waiting in line behind a guy losing his man card while he orders an “Iced, Half-Caf, Ristretto, Venti, 4-Pump, Sugar Free, Cinnamon, Dolce Soy Skinny Latte.”

No place is our human-born desire to complicate things more prevalent than in the investing game.

But while everyone else is chasing the all-time highs in U.S. equities right into an earnings recession, we are going to embrace Occam’s Razor and discuss why the “simplest solution” staring investors right in the face is to be long U.S. Treasuries.

I know, I know, Treasury bonds aren’t sexy, and their 2019 year-to-date returns pale in comparison to semiconductors (34.0%), financials (17.8%) or basic material stocks (+5.9%), all of which are solidly in double-digit territory for the year.

But here’s why being long Treasuries is the “simplest solution” to the investing quagmire facing investors early in 2019:

  • What trade works if U.S. growth continues to slow from here and the U.S. Shift Work macro theme strengthens its hold?
  • What trade works if the Fed continues down its dovish path, and gives the market an “insurance” rate cut?
  • What trade works if the Fed ignores slowing data, flips back to hawkish, and raises rates into slowing U.S. growth, thereby forcing a downside capitulation in both growth and inflation?
  • What trade works if the trade war between Xi and Trump heats back up again?
  • What trade work if Xi and Trump sit crisscross applesauce and strike a deal?
  • What trade works if global growth continues to slow, and more central banks join Bank Indonesia and the Bank of Korea at the easing central bank party?
  • What trade works if the U.S. dollar catches a bid because of a Eurozone recession, or if it doesn’t and it heads south?
  • What trade had a nice rally during May but has gone nowhere since the beginning of June?

Playing this game at the highest levels is by no means easy, nor simple. The global economy and financial markets are so complex and dynamic that it’s rare to find a single trade that works in a myriad of economic environments and central bank scenarios.

But you don’t have to overcomplicate the current investing environment; the simplest solution, and the solution that works in a number of scenarios as we traverse the final half of the year, is being long Treasuries.

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