The bull market in bonds will reach the age of 32 years in a few months. Or, will it? Market analysts have been predicting the end of the bond bull for many years. Eventually it will end. Perhaps it already has.
The yield on 10-year Treasury bonds peaked in August 1981 on the north side of 16%. Those with the fortitude to buy at that time saw their investment multiply about 4.4 fold at maturity. If they decided to roll it over, then they had to settle for what seemed like a measly 7% yield in 1991. Additionally, those bond investors had to watch a stock market zooming upward throughout the 1990s.
In 2001, when it was time to roll over those 10-year Treasury bonds again, 7% yields were no longer available. Instead, bond investors had to settle for about a 4.8% yield, not much more than what money market funds with daily liquidity were paying. However, when the ensuing 10-year period ended, that 4.8% annual return turned out to be more than 2% a year better than investing in the S&P 500.
When the time for the 2011 rollover arrived, the 10-year Treasury was yielding just 2.2%. Bond investors were no longer looking at the potential to multiply their money. After taxes and inflation, they would be lucky to break even. Still, the bull market for bonds didn’t end there, and those 2.2% yielders could have been sold for a handsome profit just a year later when the yield dropped below 1.5%.
Government bond prices peaked in 2012. On a total return basis, bonds hit new highs last month. This month, things have been moving in the opposite direction. The yield on 10-year Treasury securities spiked from below 1.7% to 2.1%. This of course causes bond values to drop, perhaps more than you might expect. The iShares Barclays 7-10 Year Treasury (IEF) dropped 3.6%, or about two years worth of dividend payments. Funds with longer-term maturities are faring worse, such as iShares Barclays 20+ Year Treasury (TLT) dropping 8.1% and Vanguard Extended Duration Treasury (EDV) plunging 11.6%. Moreover, future losses are likely to be much larger. If this isn’t the end of the road for the bond bull market, then the eventual end could produce even more fireworks.
Consumer Discretionary regained its position atop the Sector rankings after a one-week absence. This was the result of declining less than most other sectors instead of showing renewed strength. Health Care was the strongest sector over the past week, climbing from fifth to second. Financials slipped from first to third, while Industrials held steady at fourth. With the market getting a little shaky, the defensive nature of Consumer Staples helped it jump from ninth to fifth. In the lower half, Energy, Technology, and Materials all posted small improvements in their relative rankings while Telecom dropped three places. Real Estate was the big loser, plunging from third place all the way to tenth. Only Utilities ranks lower, and today’s market action is making it the first sector to flip over to a negative trend.
We’ve been expecting a major shake-up in the Style rankings for many weeks due to the tight compression of momentum readings across the various categories. That shake-up is now underway with today’s rankings looking quite different from a week ago. Small Cap Growth is the new leader, having completed its 5-week journey from the bottom. Micro Cap leapt from seventh to second and briefly traded at a new high yesterday. Small Cap Blend moved up to third. The three Small Cap categories, along with Micro Cap, were the four lowest ranked Styles as the month began. Today, three of them sit at the top. Mid Caps have been providing the leadership for most of the year but are scattered across the rankings today. Mid Cap Growth slipped from first to fourth, Mid Cap Blend fell to sixth, and Mid Cap Value plunged all the way to the bottom.
Significant changes are also evident in the Global rankings. Japan held the top position for three solid months, and much of that time it did not have a serious challenger. Last Thursday, traders walloped the Nikkei 225 for a 7.3% loss, and the ensuing loss of momentum pushed Japan down to third place in today’s rankings. Daily volatility remains quite high, but Japanese stocks are trying to stabilize and work off some of the froth. The U.S. climbed a spot to claim top honors, with strength in the U.S. dollar being a contributing factor. Europe jumped three spots to grab second place. EAFE has a large weighting to Japan, and Japan’s weakness pulled EAFE down from third to sixth. Canada improved its relative ranking but is now in danger of slipping over to a negative trend. The number of Global categories in negative trends increased from one to four this week with Emerging Markets, China, and Pacific ex-Japan joining Latin America in the red.
“One of these times, it is going to be a real selloff in Treasury bonds, and bond yields will break higher, but we don’t think the time is now.”
Jeffrey Young, U.S. rate strategist at Nomura Securities International on May 24, 2013
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