US Bonds - The End of a 30-Year Bull Market

By: Prieur du Plessis | Sun, Apr 4, 2010
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The US jobless report on Friday sparked a jump in Treasury bond yields, sending the yield on 10-year Notes to 3.95% - the highest level since June last year.

The yield on 10-year Treasuries is at long last catching up with the stronger underlying economy as measured by the GDP-weighted ISM PMI. Also, the Fed's purchasing of $1.25 billion of mortgage-backed securities ended last week, resulting in artificially lower long rates coming to an end.

Additionally the US bond market is facing a crucial time this week, with $82 billion in government bond auctions that could push yields beyond their current 10-month highs. And pundits will, needless to say, also be cognizant of massive further issuance still lying ahead. (Click here for James Grant's take on Treasury yields.)

The short-term picture for the 10-year Treasury Note shows the yield having broken upwards through its 50- and 200 day moving averages and looking set to breach the top boundary of a symmetrical triangle.

10-Year US Treasury Note Yield since October 2008

Monthly data, going back to 1998, also convey an important message when considering the two momentum-type oscillators (ROC and MACD) at the bottom of the chart below. The ROC reversed course (crossing the zero line) in October last year for the first time since a buy signal was given at the beginning of 2007, thereby flashing a primary sell signal. The MACD provided a similar indication in June 2009.

10-Year US Treasury Note Yield since 1998

Still on the topic of long-term data, actually all the way back to 1850, the graph below featured in a recent report by Pring Turner Capital Group asking: "Are you prepared for a secular bear market in bonds? Bond owners beware". As shown, the yield is just below its secular down trendline and it would not take a large move in yields to mark the end of the almost 30-year secular decline. What will this do to the US's debt burden, the economic recovery and stock market valuations?

Secular Trends in US Long-Term Interest Rates
Source: Pring Turner Capital Group

On the economic front, with the further reduction of inventories coming to a close the US could be in for rising inflation propelled by the US GDP-weighted PMI for prices and oil prices.

US GDP Weighted PMI Prices and US 10-Year Note Yield
Source: Plexus Asset Management (based on data from I-Net Bridge).

Bond yields in mature markets are likely to rise further as the global GDP-weighted manufacturing PMI continues to indicate global economic expansion. Current indications are that the yield on the 10-year Note may increase another 25-50 basis points in the coming months. However, the rise in bond yields may be kept in check as uncertainties regarding the impact of the global unwinding of stimulatory measures increase.

The last words go to Richard Russell (Dow Theory Letters) who said: "As for the bond market, I think it's looking far ahead to the time when it will be difficult to sell US debt. There's going to be just too much US debt to sell. But why can't the Fed just print the money, and with that 'garbage money' mop up the US debt? That would mean the US was monetizing its debt, which would be highly inflationary.

"The new Obama health-care will most likely add billions of dollars to the total national debt. Nobody any longer is laughing at the idea of the US reneging on its debts. It sounds outlandish, but 'escapes' tend to change with the times. Now, for the first time, we hear talk of lowering the debt rating of US Treasury bonds. This would be a disaster. To sum it up, I believe the great bond bull market (1980 to 2010) has ended and that we're now entering a great bear market in bonds."

One could short US long bonds in a number of ways by means of ETFs, for example buying the ProShares Short Barclays Capital 20+ Year US Treasury Index ETF (TBF) or, for those more aggressively minded, the leveraged (2x) ProShares UltraShort 20+ Year Treasury Bond ETF (TBT). A full list of these ETFs is provided here by On a tactical implementation note, given the strong rise in yields over the past two weeks, it is advisable to build the position in increments whenever yields show declines.

1917 Poster -- Buy a United States Government Bond 2nd Liberty Loan
Source: MarketBeat, March 26, 2010.

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Prieur du Plessis

Author: Prieur du Plessis

Dr Prieur du Plessis

Dr Prieur du Plessis

With 25 years' experience in investment research and portfolio management, Dr Prieur du Plessis is one of the most experienced and well-known investment professionals in South Africa. More than 1 000 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns. He also published a book, Financial Basics: Investment, in 2002.

He holds the following degrees: BSc (Quantity Surveying) (Cape Town), HonsB (B & A) (cum laude) (Stellenbosch), MBA (cum laude) (Stellenbosch); and DBA (Doctor of Financial Management) (Stellenbosch).

Prieur is chairman of the Plexus group of companies, which he founded in 1995. Previously he was general manager: portfolio management at Sanlam, responsible for the management of investment portfolios with total assets in excess of $5 billion.

Plexus is a pioneer in the mutual fund industry and has achieved a number of firsts under Prieur's leadership. These include the authoritative Plexus Survey, a quarterly analysis of the consistency of the performance of unit trust management companies, the Plexus Offshore Survey, the Plexus Unit Trust Indices, and the PlexCrown Fund Ratings.

Plexus is the South African partner of John Mauldin, American author of the most widely distributed investment newsletter in the world, and also has an exclusive licensing agreement with California-based Research Affiliates for managing and distributing its enhanced Fundamental Index™ methodology in the Pan-African area.

In 2001 Prieur received the Santam/AHI Business Leader of the Year award for corporate leadership, business acumen and entrepreneurial flair. He was also profiled in the book South Africa's Leading Managers (2006). Plexus received the AHI/Old Mutual Enterprise of the Year award in 1997 and was also included in the book South Africa's Most Promising Companies (2005).

Prieur is 52 years old and lives with his wife, TV producer and presenter Isabel Verwey, and two children in Welgemoed, Cape Town. His recreational activities include long-distance running, motor cycling and reading. He belongs to the Cape Town Club, Johannesburg Country Club, Gordon's Bay Yacht Club and Swiss Social & Sports Club.

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