Bonds: If You Can Look Into the Seeds Of Time, Speak Then To Me

December 26, 2012 7:30 AM EST
Heading into 2013, investors are once again scratching their heads as they puzzle over ways to trade the multi-trillion dollar U.S. bond market. After a 4-year rally that put bond yields at record lows, some investors fear good news, like the resolution of the fiscal cliff, will prick the bond bubble. Others, including some of the largest bond dealers, are loath to call a bottom in bonds and have little interest in selling their holdings.

According to recent Bloomberg data, over the last few weeks large bond dealers such as Goldman Sachs and JPMorgan, along with 21 other primary deals, have reduced the amount of bonds they offer to the Fed to $8.04 billion per day compared to $11.6 billion in 2011.

This year investors stuffed $302 billion into bond mutual funds, while equities funds saw outflows of 135 billion. These numbers pale in comparison to the Fed's balance sheet, which stands at $1.66 trillion. With a huge asset purchases planned for 2013, few expect the Fed to go away.

Last week a report by analysts at Goldman Sachs pointed toward a short term reversal of bond trends. In just four days, analysts noted $2.5 billion of outflows. Obviously four days is far from trend, and with Fed binging a reversal could be years away.

As the line from Macbeth put it, "If you can look into the seeds of time, and say which grain will grow and which will not, speak then to me." At this point, when it comes to the U.S. bond market in 2013, anything less might prove to be a gamble.

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