A revealing analysis by Bloomberg has found US bonds haven’t declined in consecutive years since the 1950’s. Given 2009's 11% decline and the continuing low inflation environment bonds just might have history on their side:
“Last year’s return, based on the note’s price change and interest payments, was negative 11 percent. This was the worst performance ever recorded by the St. Louis Fed, whose data goes back to 1928. The previous mark was set in 1999, when the 10-year security posted a negative 8.3 percent return. In the following year, the note returned 17 percent. Similarly, the total return swung from negative 8 percent in 1994 to 23 percent in 1995.”
The financial hurricane unleashed into the equity markets during 2008 followed by the bounce in 2009, which now increasingly looks this was merely the eye of the storm passing, has opened in 2010 with a slow brewing crisis in Greece, the birthplace of western civilisation. This is going to be much bigger than the Dubai debacle in December. It also threatens to draw in Portugal, Ireland and Spain whose economies are in equally if not worse shape. This grouping is colloquially known as the PIGS. The European Union's constitution does not allow for bailouts of member states. Individual states must keep their deficits below 3.5% of GDP or administer their own harsh fiscal medicine. If they do not have the political will, the Euro will be in big trouble. Greece is now in this predicament. The markets sensing blood will pick off the weak states first before moving inwards towards the core like France, Germany and UK. Contagion will spread quickly...just like the 1998 Asia financial crisis.
Strange as it may seem, the US Treasury bond market inspite of the fiscal calamity wrought by the extreme rescue measures of the Obama administration in 2009, may yet prove a temporary safe harbour as the winds ratch up a few more knots in 2010.
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