Beware the Stinking Smell of Long-term Bonds

Around the globe, the “long bond trade” has become a very crowded trade, which has led to a “condition where both long and short bond yields, particularly in the U.S., rise on even the slightest bit of positive economic news or hawkish Fed chatter,” per Strategas Research.  The back-and-forth swings from negative to slightly positive yields reminds me that bonds are a bit like “trading sardines,” a term that investor Seth Klarman coined years ago.  Investors have become dislocated from the fundamentals of bonds.  As Klarman distinguished, there are assets in which speculators employ the “greater fool theory,” which states that an asset price is based on irrational expectations rather than intrinsic value.  He referenced a previous market mania that once struck the coast of California when there was a shortage of sardines.  “Trading sardines” were not priced on intrinsic value (i.e. taste or quality) because you would never eat them, as they were simply priced by market speculators.  Long-term bonds have not been trading on fundamentals, which should be based on “providing fixed income, not fixed losses.”