Gavekal Capital: Long Duration Bonds Seem Like The Right Play

Friday, January 30, 2015

Long Duration Bonds Seem Like The Right Play

The Barclays US Aggregate Treasury total return index is up nearly 6% year-over-year. This index has a modified duration of 5.75 years. Not a bad return considering the on-the-run 5-year treasury is currently yielding 118 basis points. However, when you break out treasury returns by duration buckets, one really gets the sense of what is driving performance.

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The Barclays US Treasury 1-4 year total return index has gained 1.19% over the past year. Since the middle of 2012, the year-over-year change in this index has been in a tight range of -43 basis points to 153 basis points.

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As we move out further along the yield curve, we see returns improve. The Barclays US Treasury 5-7 year total return index is 5.5% higher than a year ago and the 7-10 year total return index is nearly 10% higher year-over-year.

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The returns get even more impressive after 10 years. The Barclays US 10-20 year total return index is up just under 15% year-over-year and the 20+ year total return index is up 30% year-over-year!

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The outperformance of the long duration plays doesn't look like it is about to end. Below are point and figure bond ETFs relative to the MSCI All Country World Index. For investors that have the flexibility to move assets between stocks and bonds, this is a useful framework for where one should be invested. Currently, of the ETFs that we track, only the long duration ETFs are in a constructive position relative to equities. Below we show three bond ETFs that are in a positive technical formation relative to equities and three bond ETFs that are in a negative technical formation relative to equities that are representative to the majority of fixed income ETFs out there (including investment grade, high yield, and agency debt).

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