Bull and Bear Markets
Consider this chart or 10-Year treasuries, courtesy of Jim Bianco at Bianco Research.
I asked Bianco for the above long-term chart. Thanks Jim!
The notes in blue and the arrows are mine. The arrows may seem obvious, now that I drew them, but they would likely have seem obvious had I drawn them differently.
Secular Bull and Bear Treasury Markets
What’s the Definition?
There is no generally agreed upon definition of a Treasury bear market.
Those who suggest a a 35-year bull market is long in the tooth, just might wish to ponder the 100-year secular bull market shown above.
In equities, a 20% decline constitutes a bear market. With Treasuries, 20% moves are ordinary. In the above chart I defined a bear market in bonds as a 100% rise in yield and a bull market as a 50% decline in yield.
With that definition we had a 100-year secular bond bull market from about 1838 to 1938 (a bit longer actually).
Like My Definition?
Hopefully, that chart makes a lot of sense at first and even second glance, but please consider zero bound effects.
Zero Bound Effects Since 2012
Since 2012, the yield on the 10-year Treasury note has doubled or halved three times. That is what happens as yields approach zero.
Japan provides a stunning example.
Zero Bound Absurdities
Bear Market Definition Refinement
To accommodate zero bound impacts, we need a ceiling breakout.
- For the US, I propose a bear market is a 100% rise in yield provided the yield tops 4%.
- For Japan, I propose a bear market is a 100% rise in yield provided the yield tops 2%.
Question of the Day
Is the bond bull over?
You tell me, but first provide a definition that makes sense mathematically, and chart-wise.
People have made fools of themselves countless times regarding both the US and Japan.
For 20 years, the long-term yield in Japan was below 2%.
My take?
I do not know if the bond bull is over, nor does anyone else.
My strong belief is the US will enter a recession and yields will tumble. I’ve been known to be wrong (and right) before.
Powell Promises Patience
Fed Chairman Jerome Powell promises patience: I say So What? It Doesn’t Matter
Similarly, economist David Rosenberg says Recession Odds North of 80%.
Given the US has $22 trillion in debt and deficits as far as the eye can see, I have doubts about whether or not the low in yields is in. Yet, we could have a 100-year bull market. It’s happened before.
People pretend they know things are are truly unknowable.
Mike “Mish” Shedlock
“People pretend they know things are are truly unknowable.”
I’m definitely stealing that line Mish 🙂
I have no basis for the following prediction other than the feeling I’m getting (which is the same feeling I got in 1999 and 2006): “too many people aren’t worried enough and then something bad happens.”
I can’t explain it any better than that, and I’m certainly not going to time the market on a nagging level of discomfort – even though I will kick myself when my pension plan tanks and I have to wait years for it to recover.
History in this matter is no guide. Interest was 20% in antiquity, but debts were often cancelled, and the principle was considered paid if the loan had already accrued twice the principle in interest payments. These were agricultural debts (barley) and cyclical factors such as weather does not last all that long. Silver debt interest (commercial) was also substantial, but the risks and rewards were rather outsized compared to current transportation.
During large portions of Roman times, interest was 12%. In the 20th century rates have gone down, but there are big differences. Risks of non-payment (barring apocalyptical future developments) are much smaller. Central banks inflate the money supply and everything runs on credit. Much larger swathes of human activity work on money payments, which have become ubiquitous. Capital can travel the globe in a micro-second (more liquid than ever) and markets have become global and synchronized.
Too much of the monetary and economic landscape has been changed to rely on technical analysis for the future of bond markets.
It happened before when we were on a Gold Standard for virtually the entire time.
This makes a HUGE difference.
Yes, the past five years have been full of lucrative trading opportunities for me as a Zero-Coupon US Treasury investor.
I believe the Treasury bull market has one “Last Hurrah” mega-rally left in it before it finally succumbs to the inevitable mathematics of multi-trillion $ annual deficits and an unmanageable National Debt.
“Yet, we could have a 100-year bull market. It’s happened before.”
It seems as if we have run out of room to have a 100 year bond bull market.