You think a generational bear market for bonds is coming -- why?
We're coming out of a generational bull market, and I believe rates for Treasury securities have traded at their lows. Over the next three to five years, I expect rates to move up significantly [which means bond prices will drop]. The Fed's policy has been to maintain very low mortgage rates to help clear the inventory in the housing sector. We expect the overhang in housing to be cleaned up by 2015. At that point the Fed will realize that inflation is becoming a problem and will begin to raise rates, and that'll be the beginning of the generational bear market.
So we're not quite there yet, but moving toward it?
That's right. If you bought Treasuries and held them for the past 30 years, your returns have been quite attractive, probably in excess of the return you would have had if you'd invested in equities. But now the upside is limited, so it's time for investors to move away from Treasuries if they haven't already begun to do so.
So should investors rid their portfolios of Treasuries?
It's always hard to eliminate an asset class because I'm a staunch believer in diversification. But if you push me hard enough, I'd tell you that I would have no allocation to Treasury securities at this point.
Link to article: http://finance.fortune.cnn.com/2012/04/18/bonds-be...