Most investors are aware that the bond market has been in a bull market for over 30 years. Historically, interest rates have a tendency to rise or fall in 20-30 year cycles.
Despite record low yields, many investors continued to call for the end of the bond bull market. They were demolished in what some referred to as the “blow off top” of the bond market.
However, it appears that the bond market may have topped. There has been a nasty slide over the last few months.
What is the proximate cause for the bond market sell-off?
Perhaps Bernanke and the Fed are not buying as many long dated bonds. Perhaps the economy is truly improving and investors are running towards equities. Maybe inflation fears are starting to ratchet up with $107 oil.
I would like to see a stock sell off and see how the bond market responds. If it does not rally as it has over the past several years we may be at the beginning of a new trend.
It’s still too early to call a top in the bond market. Most investors will be in a rush to short long term bonds using crummy vehicles like the TBT (bad tracking errors). The more important issue is not a few points of downside but rather what happens if interest rates start to rise in another long term cycle? Nobody on Wall Street has any experience with double digit rates. Nobody has any experience with PE ratios that are being compressed. Leveraged commercial loans might precipitate another crisis as LBO’s and commercial real estate struggles.
Wilbur Ross called the end of the bond bull market and expects that inflation expectations will start to dominate investor thinking.
“I think the greatest bubble that is about to burst is the 10-year and longer Treasury, because the idea that inflation is gone forever and for all time, and therefore these artificially low rates can last, is silly,” the president of W.H. Ross & Co. said in an interview with CNBC.
“I’d rather be in equities than in 10-year Treasurys,” Ross said.