Bill Gross, an esteemed figure known as the bond guru, believes that bonds are currently in a mild bear market. In addition, he predicts that the 10-year Treasury rate will go up gradually, but not sufficiently higher in the upcoming 12 months, reaching a yield of 3%. That said, are his views consistent with the current market scenario?
The probable factors encouraging Bill Gross’ opinion include government bond yields moving up due to inflation pressures and a more operative Federal Reserve. Further to this, there is a notable increase in Treasury issuance over the following 12 months.
One of the factors which is pushing yields towards a north direction, is the market anticipation of possible increase in inflation figures. That said, despite headline inflation in the US being above the 2 percent levels, core inflation which excludes energy and food prices, is still close to 1.8%. In this regard, this might be a counter argument to Bill Gross comments.
Some are of the opinion, to which I agree, that the ageing bond bull market has been kept alive due to central bank intervention throughout the globe - that is, due to artificial means, primarily through the low interest rates and quantitative easing (QE) programs. Hence, the sudden end-game of the bond bull market would be a shock to the financial market.
That being said, founder of DoubleLine Capital LP, Jeffrey Gundlach, stated that Bill Gross’ perception was too early to assume, especially since a 3% yield has not been broken yet. Also, Kit Juckes trusts that a bear market in bonds will not begin until the rate of 10-year Treasury Inflation-Protected Securities (TIPS) rises above 1%. The yield here is still notably below that 1% level.
In addition, should one consider US Treasury yields relative to global peers, Japan and Germany are being considered as supporting the argument of the end of a bond bull market. That said, even though Japan’s and Germany’s bond yields rose, there have been no noteworthy spikes that were different from past trends.
In order to state that a bond bear market is beginning after years of a bond bull market, a lot of accompanying events have to take place in order to deduce such a statement – were none exist today.
For instance in Europe, despite the European Central Bank reducing its QE programme, it still has extended the period. Hence, such an event is technically still supportive for the fixed-income markets.
In fact, when looking at 10-year US Treasury yields, it is only recently that yields have rose up to 2.737%. Thus, at this stage, such a movement in yield should be taken marginally.
In order to strengthen credence in the case of a continuing bond bull market, one should look at how strong Treasury auctions were in the beginning of January – treasuries still remain attractive to bullish investors.
In our view, the end of the bull market is a waiting game due to the fact that monetary politicians, despite indications of monetary tightening, are still uncomfortable to convince markets that easing is approaching its end. The clear statement by Mario Draghi is a case in point - monetary easing will be maintained depending on economic factors.
Disclaimer: This article was issued by Maria Fenech, CCIM intern at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.