Fresk: Bonds At A Crossroad

February 03, 2014

Is the end of 30-year bull market in rates imminent, or are we just in a cyclical bear?

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article features Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.

Over the past year, particularly the latter eight months of 2013, there has been increasing market chatter regarding the fear of rising rates and the subsequent end of the 30-year bull market in bonds.

The overwhelming analyst recommendation for 2014 is unfavorable toward the fixed-income asset class. Within the asset class itself, almost everyone is preaching a short-duration/high-spread portfolio, and, in the nearer term, I’m in the same boat.

However, after taking a step back and looking at longer-term data, the question does arise as to whether we truly are at the end of the long-term bull market in rates, or if what the market has experienced over the past 18 months is just a cyclical bear market on a continued lower-rate trajectory.

Below is a chart of 10-year Treasury yields beginning August 1986—the low point in rates after the early-to-mid-1980s decline.

10_Year_Treasury_Yields

Key Points:

  • Rates have remained in a ~2.65 percent trend channel during this long-term decline
  • During the secular bull market in bonds, we experienced six separate cyclical bear markets, notated in red
  • While the recent two bear markets have not seen the same absolute level of rate increase, the (time) duration and total return effect of the climbs have been similar to previous bear markets.

While I don’t normally use Fibonacci retracements in my analysis, a note of interest is that the recent two bear markets have topped out at the 76.4 retracement level within  the trend channel.

Change_In_10_Year_Yields

 

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