End of a Trend?

By Shlomo Maital



Bond. The name’s Bond.

No, not James Bond. Bond bonds, like, 2 per cent U.S. Treasury bonds.

We have seen a two-decade 20-year bull market in bonds. Some investors, like the legendary bond guru Bill Gross, made a fortune on it. But now, some, perhaps like Gross, may have missed the inflection point – the turning point that sees an end to the bond bull market.

   What drove the bull market? Falling interest rates, and rising bond prices, as central banks everywhere fought the global stagnation in the wake of the 2007-8 crisis by printing money and slashing interest rates.

   The booming Chinese economy, from 2002, created a huge boom in commodities and flooded with cash poorer countries that exported commodities (copper, oil, gas, iron, etc.) with cash. According to Mike Dolan, writing the “Inside the Markets” column in today’s New York Times, that boom led cash-rich countries to invest in low-risk government bonds, issued by the U.S. and other G7 countries. This led to rising bond prices and falling yields. It also led to the boom in the stock market. When you can’t make money on your investments in bonds, because of low yields, well, dump it into stocks.

   That trend is over, Dolan notes. The IMF says that the value of foreign currency reserves held by Central Banks rose in just one decade, from $1 trillion to over $8 trillion by mid-2014. That mini-trend is over too. Central Banks of exporting nations are now divesting their dollar holdings and spending them. No longer will they dump the money into U.S. Treasuries. And yields will rise, bond prices will fall.

   Central Banks everywhere are under pressure to raise interest rates, especially the U.S. Fed. Fed Chair Janet Yellen so far has delayed, and resisted, but it is inevitable. And markets are already capitalizing, into bond prices, the anticipated rate hike.  

   Dolan quotes Deutsche Bank: “The peak in bond demand is probably behind us.”

   Each of us needs to think about the implications of this inflection point, the shift from Mr. Bond to Mr. Bust.   Think about the possible teleology, or chain of events.   Higher interest rates mean….   Higher interest and debt-service costs, hurting debt-ridden governments, debt-laden businesses….and individuals?

    Lock in your low interest and mortgage rates now, while you can.