Further Signs That the Bear Market Has Begun

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We observed that the sharp fall in the bond markets Thursday, which was triggered not by news, but by a collective recognition that credit was too cheap, seemed to many to be an inflection point, an end of a long cycle of falling interest rates.

This development is important not just for fixed income investors, but for the stock market and the economy as a whole. Bear markets in bonds without fail produce a bear market for stocks. Historically, the lag was about four months, since once upon a time bond investors were conservative and equity investors perennial optimists. However, in our Brave New World of finance, a set of conditions compelling enough to convert formerly intoxicated debt investors to sobriety might capture the attention of equity investors on a faster timetable.

Further confirmation that Thursday wasn’t an anomaly but a sign of things to come can be found in the post “The Bond King’s Capitulation” at Mish’s Global Economic Trend Analysis, Michael Shedlock’s blog. He points to the change in posture by PIMCO’s chief strategist Bill Gross. By way of background, PIMCO is one of the largest, most sophisticated, and most highly resepcted fixed income managers, with nearly $700 billion in assets under management.

From Shedlock:

After yesterday’s bond rout Bill Gross finally turned bearish on bonds.

PIMCO manager says strong economic growth worldwide should push up interest rates and yields.

Legendary bond investor Bill Gross expects strong economic growth worldwide to push up global interest rates and put a damper on the Treasury market.

A long time bond market bull, the PIMCO manager says he’s now a “bear market manager” and has raised his forecast range for the benchmark 10-year U.S. yield to 4 percent to 6.5 percent. That’s up from last year’s forecast range of 4 percent to 5.5 percent.

Treasury prices have dived on inflation worries, global rate hikes and concerns of possible rate increases from the Federal Reserve. On Thursday, the 10-year yield rose above the key 5 percent level for the first time since August. Bond prices and yields move in opposite directions.

Gross said he expects global growth to advance at a strong pace of 4 percent to 5 percent over the next three to five years and for inflation to rise mildly in the United States and worldwide. That combination “is not necessarily bond-friendly,” his comments said.

Besides inflation rising slightly higher, the bond market faces other pressures. Central banks and asset managers are likely to shift away from safe-haven investments, such as U.S. Treasurys, as they seek out higher yields, Gross said.

The appetite of foreign central banks for low-risk assets like U.S. Treasurys has been one of the reasons why yields on U.S. government bonds have remained low for so long. Gross said investors should take advantage of global growth.

Are any bond bulls left?

Gross turning bearish on bonds is an interesting event. Is there anyone now who is not a bond bear? I have to admit that the break in the long term trendline on the 30-year bond look ominous.

I discussed this yesterday on my blog in Gold Breaks Down In Treasury Rout. There was an absolute rout today in bonds, not just in the US but globally. Treasury trendlines are now clearly broken in several major countries. Following is a chart of the 30 year bond showing a distinct break in a trendline that dates all the way back to 1981.

Bonds were also hammered in Germany, Canada, Japan, and Spain. Does everyone believe this growth is causing inflation story? Now? Finally? I don’t buy it.

Nonetheless, this all seems to all be a part of the “Good news is bad news story”. On the first smattering of good news (see Good News Everywhere!) traders headed to the hills (in nearly everything).

Now that finally everyone senses that the US economy is in some sort of soft patch as opposed to the Fed being forced to cut rates because of the slaughter in housing, the stock market and bond markets were both clobbered by good news.

To belabor what may be obvious to some: the bull market continued to shrug off bad news of all sorts: the weakening housing market, lousy first quarter GDP stats, signs that our trading partners are getting tired of funding our trade deficits.

They have skipped past the intermediate step of going down on bad news to flipping into bear market behavior of declining on apparent good news.

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