(09/14/12) Elections and the Bond Market

This year's US election will hold major implications for government, corporate, and municipal bond markets going forward, says Marilyn Cohen.

Investors interested in fundamentals, and of course looking at the presidential election, how is that going to affect bonds and interest rates in general and the investment environment? My guest today is Marilyn Cohen to talk about that.

So Marilyn, the election is coming up. What are your thoughts here in terms of who wins, what’s going to happen to interest rates and bonds?

I don’t know who is going to win, but I do think that if we have another second Obama administration, the bond market and the bond vigilantes will vote negatively, because they will see another four years of excessive spending, they will see another four years of I guess I should say right out lies about how they’re going to tackle the deficits. I think it will be an ugly four years for bond land.

If the Romney/Ryan ticket makes it, I do think it will be a confidence builder for bonds, because investors will believe that we are going to see cutbacks in spending across the board. It has to be across the board.

I don’t know what people think about Paul Ryan, but I have followed his career and I think he is the single person in Congress that really understands the numbers. He has his arms around not only what these numbers do when they are compounded negatively—meaning Medicare, Medicaid, you know all of the programs that we have and all the spending that we do—and the trajectory we’re on is unsustainable.

People talk about it. The fiscal cliff is on everybody’s lips, but not on the lips of the people that can do something about it.

One of the things we’ve heard just recently that the Fed is lining up for QE3 if they don’t see some improvement. The dollar is still relatively strong. Why haven’t we seen this panic that they’ve printed so much money and interest rates have not risen? What’s going on there? The deficit is still huge. Why aren’t people panicking here?

They aren’t panicking because we are doing better than most, even with our excessive debt. Really, the wild card has been Europe.

The horrific situation in Europe has made the US Treasury market and the corporate-bond market the safe haven. Who would have thought? You wouldn’t have thought this three or four years ago. Until something is resolved in Europe, I think that we will contnue to be the safe haven.

The ten-year has gone from 1.37% to 1.80%, then we’re somewhere in between; that’s still a tight trading range considering that there has been no good news out of Congress. There has no news out of the Senate for the last three and a half years. I mean, they haven’t approved a budget. So I think by default—meaning we are the backup safe haven—it’s going to stay that way until things are resolved in Europe.

All right, so if the opportunities are not in municipal bonds, there might be in some corporate bonds, but how about Treasuries? Is that still a good, safe alternative to find some income, even if it’s just a little bit?

Only if you’re incredibly wealthy and living on the income stream doesn’t matter. I would not put my clients—and I manage portfolios for individual investors like you and me—I would not put them in Treasuries. The yield doesn’t warrant it.

If you want safety and security because you’re scared to death of the financial system coming apart at the seams, then that’s your safe haven. There’s no value there.