Advertisement

The bond bull market is finally over

Investors have been talking about the end of the bond bull market for years. But it hasn't materialised - until now.

879_MW_P06_Markets_Top
The People's Bank of China may stop buying so many US government bonds

Investors have been talking about the end of the bond bull market "for years now", says Fidelity's Tom Stevenson in The Daily Telegraph. But "they have been wrong to do so". In 1981, US inflation stood at 14%, and the Federal Reserve raised interest rates to 20% to squeeze it out. The yield on the ten-year US Treasury, the benchmark for the global debt system, hit nearly 16%. As the bond prices subsequently rocketed (prices move inversely to interest rates), the yield slumped to around 2% in the early part of this decade.

Advertisement - Article continues below

Now, however, the tide appears to have turned. Fund managers Bill Gross and Jeffrey Gundlach who have built their careers on the 37-year bull market in bonds both said last week that they reckon the upswing is over. The ten-year Treasury yield has climbed to 2.6% for the first time since March 2017, and is widely expected to go higher from here, thereby confirming that the 1.6% yield seen last year was the secular low.

Slightly more normal

Monetary policy is finally "becoming slightly more normal", says Oliver Kamm in The Times. The US Federal Reserve has phased out its quantitative easing (QE) or bond-buying programme and now the European Central Bank and the Bank of Japan's QE programmes are decelerating too. Britain has started raising interest rates. Central banks had been huge bond buyers thanks to QE, but 2018 "will probably mark the first [year] since the financial crisis where major central banks start shrinking their market footprint", says Robin Wigglesworth in the Financial Times.

Advertisement - Article continues below

Fears that China may be slowing its purchase of US government bonds which Beijing denies have given the selling added impetus. Another key difference between today and previous false alarms is the strengthening global economy: it hasn't been this robust since the financial crisis that began in 2007-08. Bonds should sell off as growth accelerates. "All this creates a good case for sending bond yields a bit higher," says The Economist's Buttonwood blog. "But for them to go a lot higher requires the return of inflation, which is still hard to spot"; inflation always damages bond prices because it erodes the value of the fixed payments that bonds make.

But investors don't expect sustained rises in prices to come soon. TheSt Louis Federal Reserve monitors inflation expectations five years ahead. The forecast is currently just above 2%. In most major economies, inflation is around 2%; in the UK, it has just edged down to 3%. Here at MoneyWeek, we have long thought that inflation could come back faster than expected. Until we see signs of that, however, yields are likely to drift upwards gently.

Advertisement
Advertisement

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The charts that matter: precious metals, longevity and a cure for baldness
Global Economy

The charts that matter: precious metals, longevity and a cure for baldness

As the gold price presses on to new highs, John Stepek looks at he charts that matter most to the global economy.
8 Aug 2020
Is the bond market wrong about inflation?
Government bonds

Is the bond market wrong about inflation?

The bond rally suggests that markets are sanguine about inflation, but the gold rally suggests inflation is a real threat.
7 Aug 2020
The eurozone takes a big step forward towards fiscal union
EU Economy

The eurozone takes a big step forward towards fiscal union

The European Union’s coronavirus recovery plan and its decision to issue joint debt will change the bloc forever.
23 Jul 2020

Most Popular

Eagle Lightweight GT: the reincarnation of the E-type Jag
Toys and gadgets

Eagle Lightweight GT: the reincarnation of the E-type Jag

Jaguar’s classic E-type sports car has been reinvented for the modern age. The result – the Eagle Lightweight GT – is a thing of beauty.
7 Aug 2020
Platinum: the precious metal that looks set to play catch-up with silver and gold
Silver and other precious metals

Platinum: the precious metal that looks set to play catch-up with silver and gold

Gold and silver continue to soar, but there's still time to get in. And there's another precious metal that looks set to go on a bull run too, says Jo…
7 Aug 2020
UK house prices hit a new record high – can it last?
House prices

UK house prices hit a new record high – can it last?

Despite the pandemic, UK house prices have hit a new high. John Stepek looks at what’s driving the surge in prices, and what it means for house prices…
7 Aug 2020