Long-time bond market bull, David Rosenberg, is reassessing his outlook on the secular bull market in bonds. In this morning’s commentary he said:
“The bond market remains in a full fledged secular bull market, though it is probably safe to say after this year’s downleg in yields to new lows out to the 10 year part of the curve at least we are in the very mature phase. With that in mind, it may pay to reassess what the backdrop may look like when the Great Bull Market in Bonds, which began in 1981 with 30 year Treasury Bonds yielding 15.25%, finally comes to its glorious end.
For starters, I think it’s safe to say that the bull market in bonds will end reasonably close to the point in time that inflation (or deflation) bottoms. This is because we have determined that the only economic factor that correlates workably with interest rates, at least for long term Treasury bonds, is core CPI inflation.
…what about the end of the Great Bull Market in Bonds? It could come pretty soon. You heard right. Long term Treasury bond yields could reach a secular bottom in the next couple of years. And what will it look like? Well, rates will likely be much lower than anyone expects and, as occurs at most secular market peaks, the public will probably swear by them. In order for the public to love 2% 30 year Treasury bonds, they will first have to believe in stable or modestly deflating core CPI as a long term forecast. After all, what other safe investment has delivered inflation plus 2% or better, ghuaranteed, in the past 30 years? They will also need to be fed up with risk and, judging by the extreme volatility of the stocks and weakness in real estate, who could blame them? We can see that boomers are already voting with their feet, as the mutual fund flows clearly indicate.
Finally, the investing public will probably need to be afraid to be out of the bond market. That will most likely be due to a “flight to quality” as we continue to suffer bear market in stocks and real estate and suffer the economic setbacks of renewed recession.
Pull this all together, as I said at the outset, bonds are not better or worse than equities. They are different. It goes without saying that the best time to allocate to equities is at the point of maximum pessimism. We know that historically, that moment has coincided with valuations below 10X trailing 12 months reported earnings and dividend yields above 5% as measured by the S&P 500 index. We also know that conventional wisdom is erroneously linear at inflection points, so not only is the market “cheap” at these secular lows, but the future is much brighter than generally perceived. Pulling the trigger at that magic moment when bonds have peaked and stocks can’t hurt you anymore and dividend yields are more than secure at twice the Treasury rate would be nice. But you never know for sure at the right time or you think you know for sure too early. For now, we are not even close.”
So, Rosie says to keep on riding that bond bull market. But beware the winds of change. They might fast approach in the coming years.
Source: Gluskin Sheff