Why 2014's Big Investing Winner Is Still Winning in 2015
Interest-Rates / US Bonds Jan 27, 2015 - 04:49 PM GMTBy: DailyWealth
Brett Eversole writes: The BIG winner of 2014 will likely surprise you.
U.S. stocks increased a strong 14% last year. But another, much less interesting, asset crushed stocks. It soared 27%. And still, no one is paying attention.
This same boring asset is up 7% so far this year. And last year's big gains could continue throughout 2015.
Let me explain...
The BIG winner of 2014 was an asset investors universally hated when the year began – long-term U.S. Treasury Bonds.
Market pundits have spent years calling for higher interest rates and lower bond prices in the U.S. But as my colleague Steve Sjuggerud explained last month, these folks could be wrong...
Steve noted that the new Bond King, Jeff Gundlach, is betting on LOWER rates. Jeff sees lower interest rates in places like Spain and France. And that makes U.S. Treasuries a relative value. He expects interest rates to continue falling.
But although Jeff's the new Bond King, he's still in the minority. Investors still uniformly expect higher rates... just like they did a year ago.
At the beginning of 2014, 10-year U.S. Treasuries paid around 3% a year in interest. EVERYONE expected that yield to increase throughout the year. But like most crowded trades, the opposite occurred.
10-year Treasury yields fell from over 3% to just 2.17% at year end. Of course, this happened because everyone bet on higher rates.
This sentiment showed up in the Commitment of Traders (COT) report for 10-year U.S. Treasuries.
The COT is a report that details the real-money bets of futures traders. When traders all agree – and the COT hits an extreme – it often leads to a reversal in prices.
A year ago, traders' bets on Treasuries were at an extreme... and it led to big gains. The iShares 20+ Year Treasury Bond Fund (TLT) soared 27% throughout the year.
The crazy thing is, even after that enormous return, traders are still uniformly negative on Treasury bonds. Sentiment was just as negative to start 2015 as it was to start 2014. Take a look...
Shares of TLT are already up 7% in 2015... And sentiment is getting less negative, as the chart shows. But that doesn't mean this trade is over...
You see, these trades tend to end when sentiment gets extreme in the other direction... It'll likely end when everyone expects U.S. Treasuries to continue soaring in value. And when everyone expects interest rates to continue falling farther.
We saw that in late 2012. The COT report showed everyone expecting lower rates... And shares of TLT fell 17% over the next nine months. Importantly, we're not there yet...
The COT report shows investors have gotten less negative on Treasuries over the last few weeks. But we're still nowhere near a positive sentiment extreme.
I'm not betting against this trade until investors get "out of whack" in the other direction. Now is NOT the time to bet on higher interest rates... it's time to bet against them.
Good investing,
Brett Eversole
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