The bond market has absorbed an enormous amount of bad news. The tide may soon turn. Bond market pessimism has become so extreme that a rally is a distinct possibility.
Pessimism about bonds has been at extreme levels for several months now and the market has stubbornly refused to rally. What's different now is the willingness of a few (though a growing number of) brave advisers to buck the consensus.
Rather than falling over themselves proclaiming how awful bonds' prospects are, more and more bond advisers are beginning to tiptoe in the direction of being less bearish -- if not outright bullish.
In focusing on the potential power of this emerging narrative, I have in mind research from Yale University finance professor (and Nobel laureate) Robert Shiller.
In his latest book, Narrative Economics, Shiller argues that the stories that we tell ourselves affect not only our individual behavior but our collective behavior as well. By paying attention to these narratives, we can improve our ability to forecast the markets.
The emerging bullish narrative about bonds has hardly gone viral -- at least not yet. Most of the bond market headlines in the financial press still focus on how awful the year-to-date period has been for fixed-income investors.
Nevertheless, in recent days I've noticed a distinct shift among the bond market advisers I monitor. Their bullish arguments fall into four major categories:
The bottom line? The bond market has absorbed an enormous amount of bad news. The tide may soon turn. Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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