Sorry for the delay on the morning commentary. As you can see, I had a lot on my mind. I also decided to go a different direction after reading the following article this morning: R.I.P. Bond Bull Market as Charts Say Last Gasps Have Been Taken.
First of all, you may be familiar with the fact that news organizations sometimes dramatize headlines to get clicks. So I’m not too concerned with the sensationalism of the headline. But the article itself represents an all-too-prevalent point of view among various market commentators at the moment. Namely, that the decades long bull run in bond markets is now over.
Before even beginning, I would point out that bond yields obviously can’t go lower forever. So instead of pointing out that the bullish long-term trend is potentially over, we should instead be talking about how the future of bond yields might evolve. Most commentators seem to be missing the point, perhaps for reasons discussed in the caption of one of the charts below. Most of the rest of the analysis is in the charts themselves, so click on them for a bigger view if the font is too small.
As a sort of prologue, consider the following chart of Japanese bond yields. Some commentators have debated the possibility of other advanced economies “turning Japanese” with respect to currency valuations and market levels. I don’t have an opinion on whether that’s possible, but the chart nonetheless serve as a historical example of yields looking like they’d broken the long-term trend only to go on to make new lows (hat-tip to Edgar for the chart idea!).
Now we’ll move on to various charts of US 10yr yields. The green line in the chart below is the one that some commentators are relying on to proclaim the death of the trend. Decide for yourself if that seems a bit arbitrary and/or silly. How many times will we continue to bump out to new trendlines before we realize something else might be going on?
And now for the base case that I’ve beaten to death over the past several years. As an economy matures, and as the world runs out of the truly amazing motivations for exponential growth that involve a human labor force (if you haven’t noticed, machines and computers have been doing and will continue to do more and more to obviate human involvement in economic growth), humans are decreasingly able to drive inflation and growth.
We will ultimately end up with a huge population of non-workers that subsist on some form of universal basic income. There is no other option (unless something drastic and unpleasant were to mitigate that reality). There simply won’t be enough paying jobs for warm bodies.
Such a scenario is no basis for a scary V-shaped bounce in interest rates in the bigger picture. It is, however, a perfect argument for the asymptotic approach to a lower boundary. Keep in mind, that lower boundary could involve a range that is wide enough to ruin your day as a loan originator. We’re talking about the super big picture over the super long term.
Bottom line: talking about the death of the long-term trend is madness. It’s obviously not dead yet. It will, of course, die at some point. And it’s death is measured in gradual steps as opposed to one dramatic incident. No doubt, the recent incident has been dramatic for bond markets, but at the end of the day, that merely weakens our hero’s life force for now.