Of Bonds and Tulips

You can make or break
You can win or lose
That's a chance you take
When the heat's on you
--Glenn Frey

Peter Atwater ponders why investors would buy bonds with little or even negative yields. He largely rejects the 'safety' thesis offered by some today. After all, bonds producing negative yields are already 'breaking the buck' when it comes to preserving capital.

Instead, Atwater proposes that fixed income investors have turned into price appreciation speculators. Being long bonds has been a money trade for years, particularly when one can borrow cheaply to buy 'safe' sovereign bonds and make money on the spread. Add to that leveraged bond ETFs like TLT, which is up about 30% over the past year, and you have an asset class that makes many market participants salivate.

Being long bonds for price appreciation is particularly compelling to those who see opportunity to front run central banks engaging in QE-related bond purchases. The Fed, ECB, BOJ, et al have been buying $trillions in bonds with more planned. Why not get ahead of this seemingly 'sure thing' of non-economic buyers lighting a massive bid under bond prices?

Future historians will scratch their heads trying to determine why people bought bonds today like old Dutch speculators bought tulips.