With yields rising and investors fleeing bond funds in droves of late, it’s becoming conventional wisdom that the bull market in bonds is over. No less an authority than PIMCO’s Bill Gross, aka ‘The Bond King’, recently declared “the secular 30-year bull market in bonds likely ended” on April 29.
Supporting that view, the yield on the benchmark 10-year Treasury has jumped from a low of 1.62% on May 2 to as high as 2.27% this month and currently sits at 2.18%. In reaction, yields have risen and prices have fallen for all fixed-income securities and investors have pulled $17.7 billion from bond funds in the two weeks ended June 12, The Wall Street Journal reports.
But, to cite Mark Twain, reports of the death of the bond bull market have been “greatly exaggerated,” according to Gary Shilling, president of A. Gary Shilling & Co., and author of The Age of Deleveraging.
“A lot of people over the years have declared this bond rally of a lifetime over [and] it’s repeatedly not proved to be the case,” Shilling tells The Daily Ticker. “I don’t think it’s over.”
Shilling, a longtime bond bull, compares the current bond bull market – which began in 1981 – to the secular bull market in stocks in the 1980s and 1990s. “That was a time when you basically wanted to buy and hold [and] I think bonds are still in a secular bull market,” he says.
Of course, given Treasury yields have fallen so dramatically since the early 1980s, Shilling concedes the bond bull market is closer to the end vs. the beginning and is wary about staying at the party too long.
Still, he remains convinced the bond bull isn’t dead yet for the following reasons:
- The economy isn’t that strong, with real GDP growth averaging 2% since the recovery began in June 2009; well below the long-term average and the weakest post-recession rebound since WWII.
- Inflation has virtually disappeared, at least as it’s officially measured by the government.
- Treasuries are still viewed as a ‘safe haven.’
- The Fed will continue to “pump a lot of money,” especially as Ben Bernanke has set a target of 6.5% on the unemployment rate before the Fed heads for the exits. Regarding unemployment, Shilling estimates 1.55 million more Americans would need to be working today for the unemployment rate to be at 6.5% and “we’ll be lucky to create enough jobs to take care of new entrants” at current growth rates.
This last point bears noting, giving all the hyper focus on the Fed “tapering” ahead of today’s FOMC meeting and press conference. “The Fed is going to conclude the economy isn’t really strong enough” to taper, Shilling says and I’m inclined to agree.
Watch the video above to see why Shilling says a closer look at Bernanke's academic focus on the 1930's are integral to the way he will lead the Fed in the months ahead.
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