Update - Bond Bear Market

03/09/ 2017

By John Turner
September 11, 2016

Reposted March 9, 2017

This article was written last fall as I anticipated the bond market topping out. Since then the bond market has decisively turned downward. I believe this is the start of a long-term trend with plenty of downside potential still ahead of us.

I sit here on 9/11 and remember the feelings and the subsequent chaos that ensued on that day and for weeks on. Indeed, fifteen years later that day continues to reverberate as we contemplate our lives with the knowledge that it changed the world in ways that no one could imagine.

Chart Source: Bar Charts

Past performance is not necessarily indicative of future results. There is risk of loss trading futures and options.

In the financial world, we still think of the '08 crises and the years later culminating with the final bankruptcies that ensued ending in 2011. When I first got into the business, the 1987 crash was still in the minds of investors.

Since 2008, a steady stream of Quantitative Easing and rate cuts propelled asset prices higher further prompting a push to riskier assets and employment growth. Over the last couple of years its effect has been waning, the adrenaline rush achieving less and less of the desired effect. Traders, investors and economists are beginning to think that it’s time to wean the economy off of the monetary drug. As I used to say in my days bartending in college, it’s time to give last call. Central bankers from Japan, Europe and even Chair Yellen and other fed governors are turning out the lights, sending a clear message that it’s time for the Bond Bulls to go home and face the structural changes that inevitably must be done. Many governments are indicating a willingness to look and enact increased spending plans and tax/regulatory reform. Inflation, which is low, has bottomed and according to some at the Fed, concern about an overheating economy with falling productivity signaling a word, no bond bull wants to hear…STAGFLATION.

Noted bond managers Bill Gross and Jeffrey Gundlach have recently said we are at an inflection point in interest rates, indeed the much anticipated change in seasons may bring a winter Bear. New bond bulls continue to point to low inflation, negative rates and long term trends that began in 1982 and assuming that US rates should go to zero out to ten years. Others like myself point to the negative rates and say they won't last and will move rather quickly to zero and then higher. This past week this has indeed occurred in Germany and Japan.

A friend said to me “Can you feel fall in the air?” I smiled and said “It’s on the trading screen, time to think and make some new decisions.” No one should wait for the first snow and be left out in the cold. Stagnate trends and ideas never last.

Contact the author John Turner at jturner@hwfi.com

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