During my daily radio broadcast yesterday, I received a rather “panicked” call regarding the “dramatic plunge” in his bond funds due to the recent jump in interest rates. Of course, he is not alone. Over the last few weeks the media has done its normal headline-grabbing spin by dragging out every bond “bear” they can find to discuss why this time, unlike like the last 30 times, is definitely the end of the “great bond bull market.”
First, let’s put the recent “short covering squeeze” in the bond market into perspective. The chart below is a 40-year history of the 10-year Treasury interest rate. The dashed red lines denote the long-term downtrend in interest rates.
The recent SURGE in interest rates is hardly noticeable when put into a long-term perspective. After rates dropped to their second lowest level in history of 1.68%, only exceeded by the “great debt ceiling default crisis of 2012” level of 1.46%, the recent bounce to 2.26% was expected.
As I addressed in my weekly newsletter, subscribe for free e-delivery, I recommended SELLING bonds at the beginning of April stating:
“I recommended buying bonds several weeks ago when rates spiked up on rumors that the Fed might actually raise rates. (Hold on a second, I can’t see through the tears of my laughter)
Okay, I’m back. It is advisable to again take profits on a decline in rates to 1.8% or less. Bonds are going to continue to be a great trading vehicle for the next several years as the realization of a stagnationary economic environment settles in.”
Secondly, the recent rise is well contained within the long-term downtrend that has been in place since the 80’s. Since interest rates are ultimately a function of inflation and economic growth, there is little data that currently suggests that rates will begin to rise substantially any time soon. To wit:
