BCA Research: Take profits on long duration bond positions
"Valuation and other yardsticks argue that investors should trim bond duration to benchmark. The US and global slowdown has further to play out and credit market strains are likely to remain elevated for some time. Nonetheless, the government bond market rally is getting stretched, and we suggest taking profits on above-benchmark duration positions.
"First, our valuation models show that US and G7 10-year bond yields are trading near to the threshold of overvaluation. In the US, the real 10-year bond yield is at its lowest level since the 1970s. Moreover, the bond and money markets have already largely discounted a US recession. For example, eurodollars are priced for the fed funds rate to fall almost to zero in the next year. Similarly, investment-grade and junk corporate bond spread indexes are still below their 2002 peaks, but they too appear to be very close to recession territory."
Source: BCA Research, January 17, 2008.
