Business is life

I've decided now is a good time to put a little more money to work. After 12 months of upward market movements, which I largely attribute to the effects of global stimulus, it appears some of the reality of the long-term impact of our 'recession' is sinking in. Against this, I see one bet that makes a whole lot of sense, and that's a bet against US treasuries.

First of all, a short market recap. Last year, I felt the S&P was overvalued anywhere above 9k, and bet against this. Clearly I was wrong. The momentum of massive global stimulus efforts propelled the economy and GDP forward, and I mistakenly assumed people would discount for this. I'm somewhat vindicated in this most recent pullback, and I wouldn't be surprised to see it move further. The effects of stimulus are clearly wearing off, and the big question mark is how much ground the economy has covered on its own since then. Doesn't look like consumers have retrenched enough and debt levels are still relatively high...plus, the funny money is already back to work with the masters of the universe hiring.

In fact, if things get dimmer, some more stimulus may be in order. But against the recent European meltdown (Greece et al..), governments are starting to turn hawkish. So that first stimulus is probably all we'll get, and the market will have to stand on its own. Earnings were better than I expected this year, but I wouldn't be surprised if they level off or even move backwards into the 2nd half of this year. Sticking with 9k as fair value but not gonna bet any more one way or another.

I'm not satisfied, though, with my 1.3% savings rate. Unfortunately good investments escaped me as the world partook in another year of irrational behavior, but lately, I've had a keen eye towards Treasury yields. In case you haven't noticed, 10 year bonds are now at at their lowest levels since April 09, in the very worst of market fears. Bond investors never really bought in to the whole market rally, as the appetite for bonds remained strangely high all year. Now that fears are gripping again, bond yields have been plummeting.

Seems quite odd to think. though, that yields should be even lower than in the depths of financial crisis, when the world collapsing seemed a likelihood?

Thus, my hypothesis. I'm basing my investment on some basic logic:

1) Bond yields have a lower limit. 30 year bonds got down to a little below 3% yield last January. I'd call this a reasonable lower cap, since again, it was a pretty severe crisis back then. They are a 4% today.
2) The government spending spree is either going to lead to inflation, if the market picks up, or fiscal crisis, which is actually likelier if the market goes down. As Europe recently exhibited, fiscal crisis is not out of the picture - and for yields to go up, all it takes is for people to get a little nervous.

So I figure that bond yields going up at some point is more predictable than the market going up, because either deficit hawks or nervous investors could make this a good bet for me even if economic recovery doesn't.

I'm targeting 10% of my portfolio and averaging in over 4 weeks.