Buying treasury bonds a sign of the times ahead
Respected investment researcher Stephen van Eyk has identified what he believes is the first sign of a future share market recovery.
For the past 12 months, van Eyk has monitored the purchase of treasury bonds by banks across the globe in the belief it would signal the success of bank bailout programs and a possible return to market liquidity and, as a result, investment consumption.
Van Eyk said in times of economic distress, when loan defaults typically rise, banks have often made profits by trading on the price differential between lower yielding short-term bonds and higher yielding, longer-dated treasury bonds.
Van Eyk has been monitoring the purchase of treasury bonds by banks every week for the last year.
“Until one month ago there were no purchases. The banks were screwed anyway, so they weren’t buying anything until they got cash injections,” he said.
But over recent weeks this has changed, and as a result, so has van Eyk’s outlook.
“I wouldn’t mind betting that the market will be significantly higher in a year’s time than it is today, which is the first time in a long time I’ve been able to say that.”
Van Eyk said a return to the normal functioning of banks, assisted by government initiatives such as interest rate and tax cuts, would likely see a build-up of cash begin to occur in the market.
Following this would be a return to safe asset classes, with investors moving up the investment risk chain as yields fall.
An eventual return to the share market would be the result, led by investments in large, quality companies, with small cap and value companies to follow.
Van Eyk said because markets have been so severely discounted, significant rallies can be expected. “Low quality stuff that has really been smashed can rise 20, 30, 40 per cent,” he said.
Van Eyk said financial markets can, and do, go up, even when the economy is going down.
“Even though people are still getting laid off, the financial markets can go up. But it doesn’t mean there’s not volatility,”
he said.
“So it’s taken all year to get there, but it’s the first tentative sign. It doesn’t mean there won’t be stuff which could shake the market up again, but basically, fundamentally, the things I’ve been waiting for all year are just starting to happen.”
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