OK, well we got that out of the way, no, sort of, maybe...

The truth is the discussion is just postponed until the beginning of the year.  Perhaps that will give them time to actually negotiate and come up with a pro-growth solution that also doesn't include the country being held up at "bond" point.

Speaking of bonds, I think it is pretty safe to say that tapering discussion are going to be put on hold, officially.  What I find interesting, and perhaps telling, is that bonds have not recovered ANY of the ground lost when the tapering talk started.  I find it hard to believe everyone expected it to go on forever, so given that it was going to stop, it was just a matter of timing.  Should there really be a 1% move in the 10 year area because the tapering is starting a bit earlier than expected?

Given that it has not recovered, perhaps there is something else going on.  Is the market trying to price in increased growth prospects? Risk of inflation?  Well the inflation can be seen comparing the TIPS pricing to the regular bonds.  The "breakeven" inflation rate as it is called is around 2.3% (3.7% 30 yr bonds-1.4% for TIPS) which is not much different than the 2.2% in May before the taper talks.  Also it is still low by historical 3% standards.  Growth prospects may be better, but we still have not seen it come through in the numbers.

Perhaps the real culprit is a change in the risk profile of the US.  If market participants expect more volatility in US rates, then more return is required.  In addition, there is the problem of potential loss in credibility (reserve currency status).  Probably there is some mix between these factors.  But, the fact that bonds have not rallied means that barring some crisis in other parts of the world, there is limited upside in bond prices and the risk is to the downside.

That said, it still makes sense to me to find what are compelling opportunities in preferred stocks and corporate bonds.  With 10 yr government at 2.7 and corporates around 3.8 (LQD) for just a bit longer, I think there can be more reward going out a bit on the risk spectrum, given that I think corporate profits will continue to be strong, if not growing slowly.

There is probably not a lot of benefit gained by adding yield by moving duration out, though.  Given the overall risk for bond yields to the upside (prices lower) that I just highlighted, it probably makes more sense staying under 10 years.

More later...