Has the 32-Year Bond Rally Ended?

Yesterday, Dallas Fed governor, Richard Fisher, said the 30-year bull market in bonds was over.

He’s wrong on just one point.

It’s not been a 30-year rally. It’s been a 32-year rally.

And now we see the last few years of this rally were being fueled by nothing more than the Federal Reserve’s misguided, unwinnable war against deflation.

At just the hint that the Fed might taper off its bond-buying idiocy, interest rates began to rise back towards more normal levels.

Think about that.

The mere suggestion that the Federal Reserve would manipulate interest rates just a little less than they’ve been doing since 2007, and the party guests head for the door.

The reality is, with inflation recently running as low as 1.1%, and averaging 2% over the last few years, 10-year Treasury bonds should be at 2.5% to 3%.

In 2012, they traded as low as 1.38%.

Now, they’re as high as 2.2%.

Seems to me this jig is up. It’s about time those nutless monkeys wake up and smell the coffee…

Our view?

We’ll likely see 10-year Treasury bonds spike to near 4% in the next year.

That would mean substantial losses for investors who thought they were in one of the safest investments out there, getting yields that haven’t even covered inflation most of the time.

Riskier bonds, like junk bonds, could see a much bigger correction… maybe even as much as the stock market crash we see barreling toward us. I’m talking yields as high as 20% plus and a fall in value of 50% plus. And don’t think that’s unrealistic. Yields spiked that high during the 2008 crisis.

That’s why on May 10th, in the HS Dent Forecast, we gave a sell signal for junk bonds one day after the actual peak on May 9th. Junk bonds have already fallen 5% since then.

The bottom line is this: Now that the bond market is sensitive to the possibility of the Fed tapering off its quantitative easing (QE) and bond buying, the world has turned upside down again. Bad news is now good news and good news is bad news.

If the economy shows new signs of slowing (bad news), the Fed won’t taper off its loose monetary policies anytime soon (good news for bonds). It may even step up its efforts, but that’ll do nothing to stop company earnings from slowing and the default risk on corporate and junk bonds rising.

Better economic news (obviously good news) would mean the Fed WILL start slowing its market manipulations and interest rates will rise (bad news for bonds). Rising rates will hurt the mortgage market, the housing “recovery,” which we’re not yet sold on, and stock valuations will suffer.

The market is finally check-mated.

It’s definitely time to sell high-yield or junk bonds. It may be a good time to at least start selling Treasuries and higher quality corporate bonds.

Harry

 

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Categories: Markets

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.