With a Treasury selloff driving the yield on the 10-year U.S. Treasury note to a seven-month high of 2.44% on Wednesday, investors are wondering whether the bond market is undergoing a sea change.
DoubleLine Capital Chief Executive Jeffrey Gundlach on Wednesday tweeted that the 10-year yield is at a “critical juncture,” along with junk bonds:
10 yr UST at critical juncture & so are junk bonds. JNK & HYG ETFs coiling dead sideways near converging 50,100 &200 day MAs w/ no momentum!
— Jeffrey Gundlach (@TruthGundlach) October 25, 2017
That followed a Tuesday tweet, in which Gundlach said the “moment of truth” had arrived for the long-lived secular bond bull market:
The moment of truth has arrived for secular bond bull market! Need to start rallying effective immediately or obituaries need to be written.
— Jeffrey Gundlach (@TruthGundlach) October 24, 2017
The 10-year yield TMUBMUSD10Y, -0.30% pulled back from the intraday high but remained up 3.8 basis points at 2.444%, according to FactSet.
Some investors feel a bearish move is long overdue, questioning whether the more than three-decade old bull market in bonds has finally run its course. Bill Blain, who runs the capital markets group at brokerage Mint Partners, cited research from the firm’s in-house economist that found that the average length of nine bond bull markets had been 32 years.
“While everyone is watching the stock markets looking for a bubble to burst, or stressing about Europe, the real risk is probably complete mayhem in bond markets,” Blain said (see chart below).
Since 1980, the 10-year Treasury yield has been on a decided downtrend, but bond bears argue a reversal may lurk around the corner. After trading as low as 2.0% in early September, the benchmark bond yield pushed past the 2.40% level on Tuesday, which has served as ceiling since May.
Impetus for the selloff in the past few weeks have come from growing anticipation of the next chief of the Federal Reserve will prove a monetary hawk, and the belief that President Donald Trump’s tax reforms are making new strides through Congress after a lull in the summer where investors had all but priced out the likelihood of tax reform, as Trump’s pro-growth agenda appeared to run aground.
Speculator’s bullish bets on the 10-year note had fallen to a six-month low on Oct.20, according to weekly data from the Commodity Trade Futures Commission. Bond prices move in the opposite direction of yields.
In 2013, bond guru Bill Gross, then at Pacific Investment Management Co., argued that the bond bull market had come to an end after the 10-year yield fell to 1.67%. Though the 10-year made an early climb to 3.00%, it started a downward slide at the turn of 2014 that took it to a record low of 1.27% after the European Central Bank and Bank of Japan began their easy money policies.
Gross, however, had also argued at the time that a bear market, widely defined as a 20% drop in prices from the peak, wouldn’t occur until economic growth and inflation picked up.
Lackluster inflation, strong appetite for U.S. debt from overseas investors and the compression of the term premium have weighed down long-term yields, despite four rate increases in the current tightening cycle. The term premium refers to the extra yield investors need to be compensated for buying a long-dated bond if short-term yields do not develop as expected.
It’s why many have bet the 10-year yield will remain capped even as short-end yields, more sensitive to the swings and sways of monetary policy, gradually travel higher.