Bond Market Carnage

Since early December 2021, barely three months ago, the US Treasury market has been hammered as it’s slowly dawned that consumer price inflation isn’t going away on its own.

In terms of commonly cited yields, the ten year note has risen from 1.35% to 2.32% as of yesterday. In the interest of facilitating comparison with other asset classes, let’s look at price. An index of Treasuries of 10-30 years maturity, as tracked by VGLT, is down over 14.7%. That’s a pretty steep loss for an asset class normally associated with safety. Heck, that size of decline even prompts hand-wringing in stock markets these days. Yet from its August 2020 highs, the decline is even deeper at 24.3%.

Now to what we really care about: Where does it go from here? The ten year yield will peak this year in the 3% area. This basically would undo the head and shoulders bump since the fall of 2018. A 5-10 year chart of GOVT shows this clearly.  An overshoot to around 3.5% is possible, but a pause in the 3% area is more sustainable. Synthetic Systems sees the bottom in prices coming late third to early fourth quarter, possibly after an intervening rally. But yields in that range ultimately provoke systemic stress, leading equites to enter a bear market and bonds to enter a bull market. This also breaks the inflationary cycle in commodities. We can refine that outlook with the next SS update, due around April 1.

The bigger point though is that as dismal as the outlook for bonds in general and Treasuries in particular looks right now, in terms of price the current bear market appears closer to the bottom than the top.

 

5 thoughts on “Bond Market Carnage

  1. cb says:

    Finster said: “The ten year yield will peak this year in the 3% area.”
    —————————-
    Respect for anyone bold enough to make a call and publish it.
    ==================================
    Finster said: “in terms of price the current bear market appears closer to the bottom than the top.”
    ———————————-
    This would prompt me to ask, where and when do you see the top?

    you pointed out that the ten has moved from 1.35% TO 2.32 %. – a 72% increase (2.32-1.35)/1.35
    The VGLT hasn’t moved nearly as much ,,,,,,,,,,,,,,,,,,,, why not, I wonder

    you project the ten to move to 3% – a 29% increase (3-2.32)/2.32
    how will the VGLT respond, I wonder

    in terms of price the current bear market appears closer to the bottom than the top.

    1. Bill Terrell says:

      Have you checked out Synthetic Systems? It’s Financology’s proprietary market forecasting model; I refer to it often in posts, include this one. You can find it on the Market Analysis page.

      The current bear market in bonds first appeared clearly in SS forecasts at the beginning of last year. You can see this by clicking on Annual Charts and scrolling to Synthetic Systems 2021. The ~3% target is based on the latest update under Quarterly Charts, Synthetic Systems 2022.00, in combination with the head and shoulders seen on the 5-10 year charts of VGLT and GOVT mentioned.

      Bear in mind that charts of GOVT and VGLT are price charts, not yields, and they cover a range of maturities, not just a specific one like ten years, so inferring a yield from a given price level is a judgment exercise.

      The 3% figure is just a general area though to illustrate the point that we’re closer to the bottom than the top. I don’t go by price targets; Synthetic Systems supersedes ordinary technical analysis at Financology.

      Indeed the current post was prompted by SS indication that Treasuries may be in the vicinity of an interim bottom right now.

      “This would prompt me to ask, where and when do you see the top?”

      The top occurred around August 3, 2020.

      “you pointed out that the ten has moved from 1.35% TO 2.32 %. – a 72% increase (2.32-1.35)/1.35
      The VGLT hasn’t moved nearly as much ,,,,,,,,,,,,,,,,,,,, why not, I wonder”

      The relationship between price and yield isn’t simple reciprocal … it’s also a function of duration.

      “you project the ten to move to 3% – a 29% increase (3-2.32)/2.32
      how will the VGLT respond, I wonder”

      You can go to the sponsor’s web site and estimate it from the duration or estimate it from a chart of VGLT during which the price traversed the same yield interval.

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