On the riskiest and the best asset classes for the new year, Treasury bonds fell into both camps, depending on the strategist.
On the riskiest asset class, “I would put bonds at the top, high-quality bonds,” said James Paulsen, chief investment strategist, Wells Capital Management, Minneapolis. The major reason is because he predicts yields will rise and bond prices fall because of reinvigorated housing prices, bank lending and consumer confidence.
“Think about how much of a fear discount is in the bond yield” or “a safe-haven premium in high dividend stocks or in gold or the U.S. dollar,” Mr. Paulsen said. “I think … 2013 could be the year the safe havens get hit, high-quality Treasuries really take a hit.”
He would underweight bonds, although within that class he would favor spread areas like corporate bonds, mortgage-backed securities and emerging markets debt.
Jim McDonald, senior vice president and chief investment strategist with Northern Trust Investments Inc., Chicago, also puts investment-grade bonds at the top of the riskiest asset class. He recommends underweighting, “because you are only going to get (interest) return there.
“We want to be in higher-yielding assets,” Mr. McDonald said.
On the opposite side, A. Gary Shilling, president of Gary Shilling & Co., a Springfield, N.J.-based economic consultant and investment advisory firm, is bullish on Treasury securities.
He is bullish on their total return potential, not their yields.
“A lot of people say, 'Oh gee, why should I accept a yield of 2.8% on a 30-year bond?' Well, I've never bought the long bond for yield. I could care less what the yield is as long as it is going down” to get the price gain. That gain “vs. potentially big declines in equities, I think would be very attractive,” Mr. Shilling said.
His bullish outlook for U.S. Treasury securities is driven by three forces, including the safe-haven effect.
“I think particularly if we are entering a global recession that's going to be a very strong force,” he said
“The second one (is the) weak demand for credit ... you get with a weak economy ...
“The third one is, I think we are going to see increasing concerns about deflation.”
“Deflation is certainly not the friend of junk bonds,” Mr. Shilling said.
“You had to work very hard to default in the last few years on junk bonds, because there has been so much money thrown at subgrade companies. It would take a few years of this (deflation) before they'd be in trouble because they have carried out refinancings.”
“The atmosphere I'm sketching for the next couple of years is not a hospitable environment for corporate earnings, (the) economy in general or stocks,” Mr. Shilling said.
