US Treasuries are unloved and undervalued

TopdownCharts
01-28

Is this the most hated asset class?

The composite positioning indicator below seems to suggests so.

Everyone hates bonds right now.

And fair enough — there are several obvious reasons to hate them.

Returns have been terrible, inflation risk is lurking around the corner, fiscal concerns are running high, and political/governance risk for the US is looking and feeling more like what you’d expect in emerging markets.

But all of this is obvious and well known, which means it’s time to think.

As the old Mark Twain quote goes, "Whenever you find yourself on the side of the majority, it is time to pause and reflect."

When you take an objective and quantitative look at treasuries (I am referring to longer-term) a couple of things stand out.

Valuations are cheap.

Sentiment/allocations/positioning are deeply consensus bearish.

And support seems to be holding…

To be fair, there are several key and credible risks to treasuries e.g. if we see stronger growth and commodity prices this year (my base case) that’s going to be a headwind for fixed income as bond yields would see upward pressure in that scenario.

But if we see recession and deflation, or just growth scare, or even stock bear — or perhaps a pivot in policy by the Fed to more aggressively lean on mortgage rates by bringing short-term rates down and maybe even leaning on long-term bond yields…. those are a couple of pathways to better returns from the unloved undervalued and underestimated treasuries bucket in fixed income.

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