Interest rates backed up a bit toward the end of last week. Nobody really paid much attention, though, because they've been going down since, well, forever.
But the price action was very sloppy, particularly on payroll Friday, where a small beat plus a big upward revision sent the long bond down almost three handles. I was a little surprised at the bond market's reaction, actually. I didn't think it was that strong of a report.
But even more interesting than the bond market falling apart was Utilities Select Sector SPDR ETF (XLU) and iShares US Real Estate (IYR) falling apart. Utilities and REITs are known to be interest-rate sensitive sectors (because they pay big dividends, and act like bonds), and to see them go down so hard in sympathy with bonds leads me to believe that something funny is going on with interest rates. And I think everyone is asleep.
Of course, this would be the sixth or seventh piece I have written on how I think interest rates are going up, and, full disclosure, I have thought interest rates are going up since 2004. I will say that there is a degree of complacency this time around that I have not yet seen. We have negative rates in six countries plus one private company (Nestle) and people are just shrugging their shoulders. Everyone knows bonds go up forever.
Kind of an interesting time to be so glib about interest rates. Things could get kinky if Greece gets kicked out of the eurozone. That probably means Italian rates go up and Spanish rates go up and Portuguese rates go up and French rates go up. It likely means all rates go up. But nobody is worried about this at all. I have never seen anything like it.
I'm old enough to have seen a few cycles and typically, you have some very annoying person or people telling everyone the bear case at the top. There were vocal bears in 2000 and 2007. I am not hearing any vocal bond bears today. Is that because this actually isn't the top? Or because everyone has given up?
I think when six countries have negative rates it is time to start asking the hard questions.
As for our friends XLU and IYR, this is kind of a cheap way to play short stocks and short bonds at the same time, especially if you are bearish on bonds and stocks. I don't really have an opinion on commercial real estate (although SL Green Realty (SLG) might be an interest way to play New York from the short side), but I think the utilities are doomed long-term when you start talking about solar reaching critical mass (although that is a few years away).
I don't have much appetite to short bonds outright anymore -- I've gotten my clock cleaned too many times -- but it might be fun to short XLU or IYR for a trade. The charts are pretty terrible. They look broken. And if you know anything about IYR, during times of stress, the downside can get very spooky.