Is the bond bull market almost over?

Could this finally be the end of the bond bull market, after a 35-year run? If it is, get ready for a big shift in the investment landscape.

817-Volcker-1200

Paul Volcker yields have been on a downward trend since he was at the helm

"From Washington to Tokyo, the message is loud and clear," says Marcus Ashworth at Bloomberg Gadfly. "Central banks want steeper yield curves. They want inflation, and inflation is coming." The catalyst for change is likely to be a Federal Reserve rate rise in December, he says. "The Street has spotted it, and so has the relatively smart money." Morgan Stanley and Goldman Sachs both expect ten-year rates to rise, says Ashworth, while big investors such as bond-fund giant Pimco, plus M&G and Legal & General, have been "cutting their holdings of longer-dated bonds".

So could this finally be the end of the bond bull market, after a 35-year run? If it is, we would be seeing "the most important shift in the investment environment in our working lifetime", says Societe Generale's Albert Edwards. "The implications are massive." Hence investors are nervous that the recent moves might not just be a cyclical sell-off. They fear that "something more might be in the air" as central banks and governments call for "a decisive shift away from relying on monetary policy and toward greater fiscal stimulus".

Still, bond investors have been predicting an end to declining yields for years, says John Authers in the FT. And "it's quite possible that the bull market in bonds could continue, pushing down yields further". Yields have been falling since the 1980s, when Paul Volcker, then chair of the US Federal Reserve, finally convinced investors the Fed was "committed to beating" inflation. "The steady downward trend in US Treasury yields is one of the most lasting and reliable phenomena in finance."

Indeed, "there remain plenty of reasons to expect the rally in bond yields to be yet another false dawn", says Tom Stevenson in The Daily Telegraph. Japan's experience "shows that aggressive fiscal stimulus need not lead to rising inflation in the short term". So we could see "both fiscal and monetary policy stimulus at the same time". In Europe, the ECB's "broad hint" that quantitative easing (QE) will carry on suggests "the long march lower for government bond yields may not be over just yet".

Note also that Japan's central bank has committed to buying as many government bonds as needed to ensure the yield on the ten-year bond remains at 0% or below, says Edwards. This "was a massive change in policy that has not been fully understood by the markets". Far from rising, yields are likely to fall even lower as central banks embark on more quantitative easing. Ultimately,"I expect US ten-year yields to converge with Japan and European yields at around 1% in the next recession".

Recommended

What the return of the bond vigilantes means for investors
Government bonds

What the return of the bond vigilantes means for investors

The US Federal Reserve is dancing to the tune of the bond vigilantes, says Max King. Here’s what that means for stockmarket investors, the economy, an…
6 Sep 2022
A retail bond for income investors with a 6.5% yield
Corporate bonds

A retail bond for income investors with a 6.5% yield

This new issue from LendInvest could be attractive to income seekers willing to take some risk.
29 Jul 2022
Will the euro crisis flare up again?
EU Economy

Will the euro crisis flare up again?

With Italy’s borrowing costs rising quickly, and inflation climbing, the European Central Bank has unveiled a new tool to help indebted states. Is it …
28 Jul 2022
The wolf returns to the eurozone’s door
EU Economy

The wolf returns to the eurozone’s door

The eurozone’s intrinsic flaws have been exposed again as investors’ fears about Italy’s ability to pay its debt sends bond yields soaring.
28 Jul 2022

Most Popular

Beating inflation takes more luck than skill – but are we about to get lucky?
Inflation

Beating inflation takes more luck than skill – but are we about to get lucky?

The US Federal Reserve managed to beat inflation in the 1980s. But much of that was down to pure luck. Thankfully, says Merryn Somerset Webb, the Bank…
26 Sep 2022
The pick of this year's best-performing investment trusts
Investment trusts

The pick of this year's best-performing investment trusts

Market conditions haven’t been easy, but these investment trusts have delivered strong growth, says David Stevenson.
23 Sep 2022
The hidden cost of employee share schemes
Investment strategy

The hidden cost of employee share schemes

Paying employees in shares comes at a cost to investors – but it isn’t always easy to see how much, says Stephen Clapham.
26 Sep 2022