Bond Market Update 2015: New Bear Market Underway
Tony Caldaro | May 13, 2015 12:43AM ET
There has been lots of talk lately about a bond market top. This type of talk has actually been happening on and off for a few years. To our surprise we find we have not written a bond specific report in nearly three years. In that report we detailed why we expected bond yields to be bottoming in 2012.
The U.S. 10-Year did make a new yield low that year at 1.39%, and it has remained above that low ever since – currently 2.27%. The 30-Year also made a new low yield that year at 2.45%. It then rose to 3.98% in 2014, but renewed its decline into a lower low at 2.23% in February of this year – currently 3.04%.
This second decline to a lower low was somewhat surprising. Especially since the 10-year yield did not make a new low as well. Since bond yields tend to move in 34 year cycles and there is very little sound data to go on much past the last 50 years, comparisons between the two maturities are limited to the 1981 yield peak.
At that time, the 10-year and 30-year peaked within weeks of each other, in the fall of 1981. They, amazing as it may sound, have been gradually declining for the past 34 years. Particularly when one considers that the peak 30-year yield in 1981 was 15.21% and the recent low was 2.23%. Clearly, on average, yields do not move much at all. Compare that to the stock market, for example: the Dow has risen from 1,000 to 18,000 during the same period.
From an OEW perspective, it is also difficult to track a 34 year series of ABCs, since corrective waves can extend and extend until they complete. This is the reason we were looking for coincident lows in the 10-year and 30-year during the 30+ year period. This may still occur, and we are currently labeling the 10-year chart with this in mind. If this does not occur another view of the 34 year yield decline may be of some help.
During the entire decline from 1981-2015 the 30-year yield has made a steady series of lower highs. In fact, every high in yield has run into resistance at the monthly 89EMA. Notice how yields have risen into that EMA, get slightly above (less than 50 bps), then immediately reverse.The current level of the EMA is 3.63%. Since this EMA has been declining steadily over the years, the high points in yield have been declining steadily too.
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What this suggests is once the 30-year yield rises above a previous high, the recent high was 3.98%, the bear market in yields is over. And a new 34 year bull market in yields is underway. For those who refer to bonds in price, this would mean the bull market in bonds is over and a new 34 year bear market is underway. However you look at it, the key levels going forward are 3.63% and 3.98%. Until the latter level is exceeded, yields can still make a lower low in the months/year(s) ahead. When it is exceeded it may be prudent to await the next significant decline in yields before exiting those bonds and bond funds.
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