In the beginning of 1980s interest rates and inflation started to trend lower. They have trended lower ever since and they got to levels never seen before in the history of mankind. It feels that we have forgotten they could ever rise again. Inversely the same is true for bonds. But I think we are witnessing one of the greatest generational shifts that are happening right in front of our eyes.

What if interest rates and inflation are about to rise for the next 3 decades while treasury bond bubble is about to burst with bond prices trending lower in the same period?

Most media don’t even cover this topic. They’re too focused on clickbait stories. I covered this topic last September in But aren’t bonds supposed to only go up? and three weeks ago in Bond breakdown? posts. But it’s so important I need to give you another update.

I’m sure you are familiar with 60:40 long only portfolio principle, where 40% of your assets are invested in bonds. Many people think of bonds as a safe haven asset class that should perform well in crises. If bonds perform well most of the time but especially well during crises, then this explains why you want to own as much as 40% of bonds in your portfolio.

This played really well in a secular bull trend in bonds and a secular bear trend in inflation and interest rates. But if the secular trend turns then many portfolios may not work as good anymore, right?

In Bond breakdown? post I shared a chart of US government bonds 10 year yield. Let me share it again, but now I’ll also share charts of 10 year yields in UK, Australia, Germany and Japan. First a monthly chart of the US yields.

We see that yields are already breaking out with 50 month moving average turning higher as well. They could rise to 4-4.5% before we even see a pause.

The US has already started hiking rates as their economy is the strongest in the world right now. Other central banks are still delaying this decision, but it seems it’s just a matter of time. As said many times before inflation signs are everywhere and if nothing else they’ll be forced to start raising to tackle inflation pressures.

So, let’s move to a monthly chart of the UK yields now.

We see that it’s lagging the US yields for obvious reasons, but there are constructive signs of a bottom in place. If I’m right on the secular trend change, there is just a matter of time when the UK yields get above 1.75% and confirm my thesis. 

Very similar to the UK yields chart is Australian monthly yields chart. 

Now, the German yields don’t look as constructive yet. But as we know ECB has been very aggressively purchasing European bonds and thus artificially keeping yields very low. We also know that ECB is about to stop buying bonds next year and what do you think might happen then?

If yields around the globe are rising then… yup, you guessed it, chances are European and German yields also rise over time.

And here is also a monthly chart of Japanese yields. 

Another similar conclusion. In my mind it’s really hard to ignore these developments. Sure, the US is leading the way and other developed countries are laggards here. But not only that we’re seeing very constructive developments in charts, the tide has started to turn when it comes to central bankers as well as inflation pressures.

Will inflation and yields only rise from here on? I’d say that for the long term the answer is yes because I believe the secular trend is turning. There will also be cyclical corrections. We’ve also seen them during the secular bear market when the rates picked up and bond prices fell. But don’t forget to take a step back then and take a longer term view to gain perspective.

There is also a serious risk to traditional portfolio theory and 60:40 portfolios, because it could just suddenly stop working and it could happen that people will need time to adapt. If you ignore the signs, it could happen to you too.

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Join the conversation! 2 Comments

  1. Ray dalio says there is going to be a bond crisis. 230 trillion global debt will never be repaid. There will be reset. Long on precious metals and commodities, short on $.


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