This morning I read a couple of articles from interest rate strategists making a case for buying government bonds. One of them saw the yield on the U.S. 10 year Treasury bond falling from where it is now at 2.98% down to 2.10% at some point this year.
However, those views are swimming against the tide of reality. Since July 2012, 18 months ago, bonds have been moving in a direction that is different from the direction they were moving in for the previous three decades. From the beginning of the 1980’s to July 2012, bonds were in a Secular Bull Market as yields consistently fell during that stretch with a few minor interruptions. Since July 2012, yields have been rising.
The cycles between Secular Bull Markets and Secular Bear Markets in bonds are prominent during financial market history and tend to shift once in a generation (about once every 25 to 30 years). When the yield on the U.S. 10 year Treasury bond hit 1.39% in late July 2012, that was just such a shift. As the chart above shows, the bond market action on both sides of the shift are distinguishable.
One thing that can temporarily disrupt the new Secular Bear Market in bonds is a rush to the relative safety of the U.S. dollar and U.S. government bonds in response to some global financial cataclysmic event. However, that is not what these strategists mentioned when they talked about the potential for rates to fall this year.
That said, even the gutsiest bond bulls would hesitate to state that we will see the benchmark yield back to its generational low of 1.39% in late July 2012. In fact, it is likely that we will not see the benchmark rate back at that level in the next half century. Talk about long-term! But, Secular trends in the bond market are long-term.
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