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Updates: Bonds and Ag

The past few posts have been about bonds and agriculture, both of which had major events the past two days, so I thought an update would be appropriate.

Bonds

We have had a seminal event in the bond market: for the first time EVER (ok, not ever, just 1962, but that is 48/49’s of my life which seems like ever), the dividend yield on the Dow Jones Industrial Average has surpassed the yield on the 10-year treasury bond.

Courtesy of Doug Kass' Blog

Courtesy of Doug Kass' Blog

You can see that the yields have crossed on the chart above. In my mind, that means that bonds have moved up in price (and consequently down in yields) more than they should have. The people buying them will very likely see a capital loss in their holdings when yields move to a more normalized level. As an example, if the yield on the 10-year treasury moved back to the 4% level that it was at last Spring, people who are buying the 10-year treasury bond today will see a capital loss three times greater than the income they would derive from the bond. Not an inconsequential event.

As I’ve mentioned previously, we are reducing duration in bond fund portfolios and reducing credit risk as both the treasury and the high yield sectors of the market have seen way too much money flow into them.

Agriculture

The other evening I wrote a blog entry on how we had increased our Agriculture holdings and would be continuing to do so based upon our anticipation for commodity inflation and supply/demand imbalances. The next morning, a huge merger announcement was made public: BHP Biliton had made a hostile takeover offer for Potash Corp from Saskatchewan, Canada.

pot

Yesterday, Potash jumped 25% on the news – and the Potash board rejected the offer as being too low. As demand for grains increase with the increase in population and the increase in the size of the middle class in the developing world, farmers will be required to increase their yields from the same acreage. Potash is a key component of that as it replenishes the nutrients in the soil that the crops drain out.

This is the beginning of the trend, not the end.

Mark