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Bull markets come and go. Or do they?
Investors buying U.S. government bonds can point to a nearly 30-year run of consistently higher prices with very little downside disruption.
People often cite the powerful bull market in equities from 1980 to 2000 as a unique and amazing run. The current bond market, however, has now outlasted that “once in a lifetime” event by 10 years.
One easy explanation for the longevity of the bull market in bonds is the extreme stretch that occurred throughout the 1970s until 1981. U.S. bonds were paying 15 percent annually by 1981, which is near historically high levels for any type of stable government in history.
Then we went from one extreme to the next, bringing us to a coupon of 2.2 percent by the end of 2008.
In essence, coming off the raging inflation of the 1970s, the interest-rate environment was ripe for a long-term decline. At some point, though, all good things come to an end. The same goes for today.
There is a real possibility that the highs for the bond market have been reached, and we are in the early stages of what may turn into a powerful, sustainable and long-term bear market for government bonds.
A noticeable top in prices must be in place before a bear market begins. Increasing levels of selling pressure show up after investors realize new highs are not coming for quite some time. The most recent high in the bond market, $138.05, was seen 13 months ago, in December 2008.
Another indication of coming investor pessimism is often lower prices. Bond prices are down about 15 percent from the December 2008 high. That may not be enough to kick up the fear factor to the point of seeing sharply lower prices in the near term. It is important to keep in mind, though, that bear markets typically see the worst selling near the later stages of the cycle. Early price drops usually lead people to convince themselves they are seeing normal market action.
Why then do we believe the great bull market in bonds is over? For this, we turn to some traditional technical indicators such as trend lines and moving averages to provide a clear analysis of what is really happening.
A 200-day moving average of prices has served well over the years to help determine bull- or bear-market status. The 30-year bond price fell below the 200-day moving average in April 2009 and, prices are firmly below what is now a clearly down-trending 200-day moving average line.
A look at a chart of the yield for the 10-year bond is showing similar, although inverse, characteristics. The yield is above the 200-day average and has been in a short-term uptrend since late November. The rate is currently hitting some overhead resistance near the 4-percent level.
A near-term break above 4 percent will serve as a confirming indicator that we are indeed seeing a bear market.
Long-running bull markets have a tendency to end in an explosion of activity. Think tech stocks in the late 1990s. The NASDAQ experienced a steady upward march throughout the decade until the middle of 1999, when the market went almost vertical as it doubled in less than a year.
The commodity run in the 1970s showed a similar trait, with gold doubling in the last 18 months until it hit a 27-year high of $850 an ounce. On a chart, these moves look like mountain peaks.
Technical analysts call these terminal moves “blow-off tops.” The 30-year bond price peak in December 2008 was the sharpest run during the entire bull move going back to 1981. It fits the bill of a blow-off top.•
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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.
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