The long Treas. yield has trended steadily lower since the early 1980s. It has accompanied major
downtrends in short term interest rates and the yr/yr % change of the CPI. Budget deficits
and the sharp rise in US Gov. debt outstanding over this period had no discernible effect on
the steep trend down in the 30 yr. yield. As a matter of fact, premiums built into the yield
for the rising supply of Treasuries have fallen over this period as has the premium in yield
over the inflation rate. ^TYX Chart
Trend resistance down from the latter 1980s is now around 4%. So, as has happened
periodically, the bond, at 3.77%, is close to trend resistance and a rise in the Long Guy's
yield above 4% would be weak prima facie evidence that the major run down in yield and
dramatic rise in the price of the bond would be over.
The strong case for saying the bull market in bonds is over implies a progressive return
to more normal economic activity to include an end to the Fed's ZIRP policy for short rates
as well as some increase of inflation pressure that is more than cyclical or otherwise transitory.
If the US economy can re-establish more normal growth with some increase in short rates plus
a return to 2-3% inflation, the bull run in bond prices would end, but one cannot infer from
this development that a new bond bear market is evolving. For example, in a more normal
economic environment, the 30 yr. Treas. could trade between 3.5% and 5.5% for an extended
period so long as the inflation rate remains rather moderate. In short, since the fate of the bond is
up to the future level and direction of short rates and inflation, it would likely be unwise to
jump the gun in the absence of a firm economic case.
The first thing up for now is to see if the economy is strong enough and traders have conviction
enough to finally crack that very powerful downtrend line of resistance. You will note that
players are now content to trade the bond below 4% and not challenge resistance without more
compelling evidence that it is indeed time to put the bond bull to rest.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!