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Boring bonds beat sexy stocks. Here's why

July 31, 2014: 1:39 PM ET
Stocks are for those who like risk while bonds offer stability. But that hasn't been the case so far this year.

Stocks are for those who like risk while bonds offer stability. But that hasn't been the case so far this year.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

Bonds are supposed to be for conservative investors who are not willing to take on a lot of risk and don't get freaked out by the daily market headlines. Professional fixed-income investors are data wonks happy to accept small returns over the long haul.

Stocks? They are what should give you the biggest bang for your buck. They're sexy. But investors often overreact to news and tend to get a little too focused on the short-term. This 1986 hit by Janet Jackson might as well be the stock market's theme song.

So you might be surprised to learn that bond investors and stock investors seem to have traded places like Eddie Murphy and Dan Aykroyd (yes, I'm a child of the 80s). Sleepy Treasury bonds are unexpectedly outperforming stocks by a pretty wide margin.

Just check out how the iShares 20+ Year Treasury Bond exchange traded fund (TLT), a popular proxy for long-term government bonds, has done compared to the S&P 500 (SPY).

What gives? Weren't bond prices supposed to plunge and yields soar as the Federal Reserve started cutting, or tapering, its asset purchase program? Many experts predicted at the start of the year that there would be a so-called Great Rotation out of bonds and into stocks.

Treasury yields, which move in the opposite direction of prices, were expected to surge as investors dumped bonds. This had the makings of another bond bloodbath year like 1994. Yet, long-term rates are down this year and remain incredibly low.

The 10-year Treasury is nowhere near the 3.4% level that strategists surveyed by CNNMoney predicted back in January.

I think the bond bonanza is a sign that the market still doesn't believe the stock rally is for real.

There are so many concerns about how a correction, or worse, is around the corner. Thursday's big stock market sell-off is a reflection of these jitters.

CNNMoney's Fear and Greed Index, which looks at the VIX (VIX) volatility gauge and six other indicators of sentiment, is now in Extreme Fear mode. It's a bit of a shock since the Dow and S&P 500 aren't that far from all-time highs.

Click the chart for more on CNNMoney's Fear and Greed Index.

Click the chart for more on CNNMoney's Fear & Greed Index.

But it goes to show that more investors seem to be nervous about a possible crash than excited about the prospect of stocks going even higher. One of the seven indicators looks at safe haven demand, which is showing that the recent performance of stocks versus bonds is the weakest in about two years.

Low long-term Treasury rates also seem to be an indication that the bond market thinks the economy is still just limping along. If the economy was really heating up and inflation was really a serious risk, rates would probably be much higher than they are now.

But when you combine the 4% GDP growth from the second quarter with the weather-induced decline of 2.1% in the first, you're left with an economy that's still growing a a mere 2%-ish clip.

And all the recent geopolitical turmoil (Ukraine-Russia, Israel-Gaza, Argentina default, Portuguese banking crisis, etc.) may be steering more foreign capital to the security of U.S. bonds. China and Japan continue to be big buyers of U.S. debt after all.

Consider that gold, another safe haven asset in tumultuous times, has also done well this year. The SPDR Gold Shares Trust (GLD) ETF is up slightly more than the broader market.

Now I still don't think the market is about to crash -- even though this could be the beginning of a much-needed correction.

But the sizzling performance of the supposedly staid bond market should not be ignored. It shows that the economy still isn't close to being fully recovered -- and that stocks aren't the only game in town for investors. Bond investors can enjoy double-digit returns every now and then too.

Reader Comment of the Week! For the second week in a row, a former CNNMoney colleague wins this "honor." Just goes to show that you're not dead to me once you leave the Time Warner Center. (More about that in a bit.) The tweet was a response to one of mine regarding Argentina's default.

Is there a golden Twitter bird, Jason? You just won it! GOOOAAL!

The Final Cut ... and some fond farewells. The wackiness in the Russian stock market prompted me to send out one of my Name that Tune tweets. The winner gets bonus points for a Muppets reference ... despite a slight misspelling of the name of a certain comedic bear.

It's Fozzie. But I'll forgive you. This isn't Jeopardy where your Final Jeopardy answer has to be spelled correctly. Anyway, that Pink Floyd song is from the love-it or hate-it (I strangely love it) Final Cut album. It was the last one with Roger Waters. And fitting with the Argentina theme, it was actually a concept album about the Falklands War. Seriously.

And now the part of the column I have been dreading all week. CNNMoney will be saying goodbye to two awesome talents on Friday. Senior writer Annalyn Kurtz, our economy reporter extraordinaire and my Fed partner in crime, is off to a extremely well-deserved and prestigious Knight-Bagehot fellowship at Columbia University.

It has been a pleasure getting to work with her, edit her and sit next to her for the past few years. Her tenacity and passion will be sorely missed. Congressional hearings with Fed chair Janet Yellen won't be the same. ("That's such a stupid question!") Congratulations, Ann! I am so proud of and happy for you.

And then there's Dana Lipnickas, my graphics collaborator -- and Brooklyn neighbor. She's off to New Haven for a job at Yale. She has put up with so many of my silly requests for images and photo manipulations. She took every strange idea of mine and made them better. She is responsible for today's bond/stocks emoji.

We always joked that one day I'd give her a reason to design a Dr. Evil-esque sharks with frickin' laser beams attached to their heads image for one my columns. "Is that so hard?" Sadly for me, we ran out of time.

As a final salute, here is my favorite graphic she ever did for The Buzz. I almost chose the bizarre Twitter-taur (blue bird head on body of a bull) she did earlier this year. But this image, for a column about how big bank stocks were doing just fine despite regulation is perfect. I still have the e-mail response I sent her after I first saw it.

"I am almost in tears. That's how much I love this."

I still do. And hey, who on the Internet doesn't love a good cat image!

wall-street-fat-cats-614xa

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    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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    The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.

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