ROSENBERG: THE BOND BULL MIGHT BE COMING TO AN END
Long-time bond market bull, David Rosenberg, is reassessing his outlook on the secular bull market in bonds. In this morning’s commentary he said:
“The bond market remains in a full fledged secular bull market, though it is probably safe to say after this year’s downleg in yields to new lows out to the 10 year part of the curve at least we are in the very mature phase. With that in mind, it may pay to reassess what the backdrop may look like when the Great Bull Market in Bonds, which began in 1981 with 30 year Treasury Bonds yielding 15.25%, finally comes to its glorious end.
For starters, I think it’s safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that the only economic factor that correlates workably with interest rates, at least for long term Treasury bonds, is core CPI inflation.
…what about the end of the Great Bull Market in Bonds? It could come pretty soon. You heard right. Long term Treasury bond yields could reach a secular bottom in the next couple of years. And what will it look like? Well, rates will likely be much lower than anyone expects and, as occurs at most secular market peaks, the public will probably swear by them. In order for the public to love 2% 30 year Treasury bonds, they will first have to believe in stable or modestly deflating core CPI as a long term forecast. After all, what other safe investment has delivered inflation plus 2% or better, ghuaranteed, in the past 30 years? They will also need to be fed up with risk and, judging by the extreme volatility of the stocks and weakness in real estate, who could blame them? We can see that boomers are already voting with their feet, as the mutual fund flows clearly indicate.
Finally, the investing public will probably need to be afraid to be out of the bond market. That will most likely be due to a “flight to quality” as we continue to suffer bear market in stocks and real estate and suffer the economic setbacks of renewed recession.
Pull this all together, as I said at the outset, bonds are not better or worse than equities. They are different. It goes without saying that the best time to allocate to equities is at the point of maximum pessimism. We know that historically, that moment has coincided with valuations below 10X trailing 12 months reported earnings and dividend yields above 5% as measured by the S&P 500 index. We also know that conventional wisdom is erroneously linear at inflection points, so not only is the market “cheap” at these secular lows, but the future is much brighter than generally perceived. Pulling the trigger at that magic moment when bonds have peaked and stocks can’t hurt you anymore and dividend yields are more than secure at twice the Treasury rate would be nice. But you never know for sure at the right time or you think you know for sure too early. For now, we are not even close.”
So, Rosie says to keep on riding that bond bull market. But beware the winds of change. They might fast approach in the coming years.
Source: Gluskin Sheff
I’ll be getting outa my bonds when Europeans are getting in.
Cullen – This goes back to your “Fed intimidation” and the correlation of the FFR and Treasury yields. Tie in CPI-AUAI-exFE RoC or some other CPI measure and you will find a ~70 – 77% correlation since 1971.
I continually hear people say, “rates have to go up sometime” but few people talk about the mechanism that causes those rates to rise meaningfully. When they do, it’s “market forces.” From the data you and others have looked at (including myself), I would rather bet on the Fed than the bond vigilantes – at least in countries with monetary systems like the USA.
Right. The market might front run the Fed, but the key will be Fed language. When they hint at rate increases, run for the hills and sell those bonds.
when they hint at or increase rates you’ll see lower mid-to-long term rates, a flattening in the curve, as inflation expectations are eased with tighter policy.
however by this time we’ll have much higher mid-to-long term rates to begin with, so you’d be a little late on the selling.
Ah, but that assumes the FED is in control of both short term and long term rates. And the FED isn’t. I have a graph that shows that the FED FOLLOWS Mr. Market during the 2000-2007 frame. TPC, are you interested ? The graph is from the folks at Elliot-Wave.com. (Robert Prechter).
Interest rates always go down in a recession. MMT or no MMT. FED intervention or no FED intervention.
The fact that Bernanke says that he will leave rates this low at least up to 2013 means that he doesn’t see the US economy recover before (and including ??), at least, 2013.
Short term rates in the senior currency ALWAYS go down to nearly nothing/zero in a post bubble credit contraction. Like they did after 1929. In the 1920s the senior currency was the british pound sterling and now it’s the USD.
In the 1920s Britain ran a Current Account Deficit and the US was running a Current Account Surplus. And that’s why back then the GBP was the senior currency and NOT the USD. Confusing ? Not in the least when one knows what the REAL Macro Economic Picture is.
Why would FED ever want to increase interest rates? They haven’t so far despite all the moral hazard and destruction of savings. So, it is hard to see what would be a catalyst.
Thanks for bringing into your site Rosenberg’s opinion on bonds.
“When they hint at rate increases, run for the hills and sell those bonds.”
The only way the Fed will even hint at rate increases is when there has been substantial turnover in current Fed membership, or when the Republican wolf is at their door threatening them with anti-Fed legislation. If Romney is elected in 2012, he is the last person that would threaten the Fed, except if Obama is relected in 2012, and then Obama is the last person who would threaten the Fed.
Forget fundamentals; think politics and optics instead. The Fed is now as politicized as it was when Arthur Burns and William Miller were carrying Nixon’s and Carter’s bags.
How much can the bond bull go anyway? There isn’t much space between current rates and zero. Once the 30 yr rate is pegged to zero, is there any way for Bernanke to push it negative? I can see short rates going negative, even sharply so, but not long rates.
Anyway, if you plotted the 10 and 30 yr rates for several decades, they cross the zero line sometime around the end of this decade, give or take a few years. The decline in the 30 yr over the last 30 years has been surprisingly close to linear. At some point the decline must stop and the direction must be up.
The 30yr Treasury bond yield is currently 3.17 percent. If that yield drops to 2.00 percent, the bond price will increase by approximately 25 percent. So yes, the bond bull still has some room to grow.
I have been an ardent Rosie follower and a bond bull for more than 3 yrs, going back to early 2008. The 3 yr average annualized return on Vanguard IT Investment Grade bond fund was 14% annualized, 43.5% gross return over 3 yrs. Now I will be on the lookout as to when to sell. I suspect it will be at least another 6 months. In addition to Fed rate policy hints, I will also be looking for anything that stimulates economic growth, or leads to increased inflation plus growth. I don’t think bond rates can go up without growth in total borrowing. Total loan demand is shrinking now, hence the bond bull market. JSwede and others, what other signs would you be looking for?
I’ll just quote Hugh Hendry. “”The government bull market in T-bonds has been epic. And epic markets don’t end with a whimper. They end when everyone is drawn in and yields are outrageously low”".
I would look for a spike like what silver did in the 1st part of this year. I thought we had had such a spike but at this moment the graphs don’t confirm the notion of a spike in price. But we’ll have to wait and see. Made money being short but now I am on the sidelines again.
I also watch what happens to the Trade Deficit. If that narrows significantly/dramatically then we could expect an (sharp) rise in US yields.
The long bull market in bonds that started in 1981 actually flattened out around 2003. Long yields have hovered around 4-5% since then. The spike down in 2008 and today have been the exceptions, related to flight-to-safety episodes. When the current episode ends, will yields head back north of 4%? Beats me, but probably not unless the Fed gives the word.