10-Year

As global rates have taken a precipitous dive the last few months, it’s been hard not to hum “Limbo Rock.” And just like Chubby Checker, we’ve been asking our screens “How low can you go?” on a daily basis.

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February’s Oscar win validated our efforts to make the ‘Green Book’ suitable for all audiences, like our decision to relegate “bottom-quartile” valuation outcomes to the very back of the publication.

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While investors obsess over the market level at which a hypothetical “Powell Put” might come into play (or whether such a put even exists), they seem to have overlooked the absence of another such put that proved dependable throughout the cyclical bull market.

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It’s been popular to argue that U.S. government bonds are a bubble while U.S. equities are not. But even if we agreed, the potential cyclical total return losses in Treasury bonds are a fraction of those likely to occur in an equity bear market.

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The gap between the 10-year Treasury yield and the federal funds rate has narrowed sharply in the last year but remains a long way (~110 basis points) from inverting.

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Last October our VLT algorithm recorded a bond BUY signal—one that we said, at the time, conflicted with our outlook.

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Yields on 10-year Treasury bonds have still not breached the 3.00% level that many believe will stick the proverbial “fork” in the secular bond bull market that began in 1981. That could well in happen in the next few weeks, but we believe it’s important to step away from the daily fray and reflect upon the damage that’s already been done.

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Yields on 10-year Treasuries are up 10 bps since stocks peaked in January, a clear break from the behavior of prior corrections. The last four stock declines of 10%+ were self-medicating—having been accompanied by bond yield declines of 50 to 150 basis points.

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We somehow missed this signal in January, perhaps because we were pre-occupied with so many other signs of “climate change.”

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At the risk of yelling “fire” in a crowded theater, we present a few parallels between recent action and the year leading up to the October 1987 crash.

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Bond market strategists remain hell bent on identifying the key yield level on 10-year Treasuries at which one can finally declare an end to the 1981-20XX secular bond bull market.

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While there are many parallels between recent action and that of 1999-2000, stock market leadership is not one of them.

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The implication from VLT Momentum is that bonds are sufficiently oversold (or, equivalently, that yields are sufficiently overbought) to trigger some degree of mean reversion over the next several months.

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Sometimes we feel compelled to report findings that conflict with our outlook. And then there are the even rarer times we actually do it.

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We find it remarkable that the five-year trailing real return on Treasurys has dropped to zero without investors having (yet) suffered any real pain.

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Bond investors residing in the Lower For Longer© camp no doubt feel vindicated by the summer rally that’s taken yields on 10-year Treasury bonds to as low as 2.06% in early September.

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On a 50-year view, stocks do indeed look cheap relative to bonds. But the inclusion of 90 earlier years of data muddies the message.

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Throw anything at them and bonds can shake it off. The multi-decade march toward ever-lower yields seems unstoppable, not even by the zero line.

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Despite the improvement in market sentiment, U.S. bond yields were dragged lower by their international counterparts.

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Last month we discussed the negative market implications of May’s “Death Cross” signals in the Dow Transports and Dow Utilities.

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