Treasury bond yields have surged since their December lows. Today's auction of 30-year bonds resulted in a higher-than-expected yield, even though Treasury was only selling a relatively paltry amount, $14 billion, compared to the trillion-dollar deficits that will be the norm for the next several years at least. Due to sharply higher yields, 30-year Treasury bond prices have fallen 25% so far this year.
The equity market has rallied, and the Treasury bond market has sunk, because the market has realized that instead of collapsing in a deflationary depression, the economy appears to have stopped declining and deflation is nowhere to be seen.
All those investors and speculators who were desperate to pile into cash at the end of last year have apparently been asking themselves this year whether they want to hold onto an asset that yields almost nothing. On the margin, investors have concluded that they want less cash. As the world attempted to reduce its cash holdings, the prices of other things have risen: equities have surged, commodity prices are up across the board, junk bond prices have rallied, and emerging market debt and equities are on fire.
As I said in a post last December, if the economy doesn't continue to deteriorate significantly, then cash will prove to be a major embarrassment. Today I would modify that statement as follows: If the economy doesn't deteriorate significantly, then cash will continue to be a major embarrassment.
So, in the absence of any sign that the economy is deteriorating, and in the face of mounting evidence that the economy may actually be recovering, I think the trends we have seen so far this year will continue. T-bond prices will continue to fall, while the prices of just about all other asset classes will rise. TIPS prices may not rise, but TIPS will benefit from the rising inflation that is likely to follow the rise in commodity prices. Selloffs such as what we see in the equity market today are to be expected of course, but they just create buying opportunities for those who are embarrassed by their cash holdings. The attractiveness of cash is not likely to improve any time soon, since the Fed has all but pledged to keep short-term rates near zero for a long time, and all major central banks are toeing the same line.
Full disclosure: I am long equities, long emerging market debt (EMD), long emerging market equities (SLAFX), long TIPS (TIP) and short T-bonds (via TBT) at the time of this writing.