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Subject:  Excellent Long-Term Mkt History Date:  4/25/2007  12:49 PM
Author:  Greshm Number:  6651 of 767

I'm gonna post the whole story here, gotta save this one for the long-term perspective in case Bloomberg doesn't keep in the archives forever.  More investors should visit the articles on Bloomberg and substitute Bloomberg radio or TV for the hyped content on CNBC:

In Case You Missed It: Charts Show Bond Rally Is Over (Update1)
By Elizabeth Stanton

April 23 (Bloomberg) -- The biggest bull market in U.S. Treasury bonds is over, according to the analysts who rely on historical price patterns to make their assumptions.

The proof that it now pays to be bearish can be found in financial futures based on the government's 4 3/4 percent bond maturing in 2037, a benchmark for the 22-year, 11-month rally that began in May 1984 and ended on April 6, says John Kosar, president of Asbury Research in Lake in the Hills, Illinois. That's when the price of 30-year Treasury bonds for delivery on the Chicago Board of Trade fell below 110 20/32 and signaled a new direction for the market, he said.

The turning point was so obvious that even ``a five-year- old who has a ruler and a pencil can draw a line under the lows and make a determination'' that bond yields have bottomed and are poised to climb for many years to come.

While former traders like Kosar don't get much respect in academic circles, they insist their charts confirm what some investors already know: ``that inflation is the issue,'' he said.

The Federal Reserve's preferred measure of inflation, the price index for personal consumption expenditures excluding food and energy, has been 2 percent or higher since April 2004. In the previous eight years, it topped that level during only six months. Core inflation was as high as 4.7 percent in 1984 when 30-year bond yields rose to 13.9 percent.

Twin Deficits

``There have been only three reversals into rising rate cycles in the last 200 years; we are in the fourth,'' said Louise Yamada, the former chief technical analyst at Citigroup Inc. who now runs Louise Yamada Technical Research Advisors LLC in New York. Yamada, who started as a technical analyst at Smith Barney in 1980 and was top ranked in Institutional Investor magazine's annual survey from 2001 through 2004, says that while previous bull markets in U.S. bonds ranged from 26 to 37 years, the most recent one was the biggest.

Investors who bought Treasuries in 1981 reaped almost twice the returns as those who bet on the Standard & Poor's 500 Index.

Bill Gross, who manages the world's biggest bond fund as chief investment officer of Newport Beach, California-based Pacific Investment Management Co., says yields must rise in coming decades to attract the foreign capital needed to finance record federal budget and trade deficits.

The Congressional Budget Office estimated that the deficit will widen to $304 billion in fiscal 2009. The gap in goods and services traded totaled $58.4 billion in February. A 1 percentage point increase in the deficit as a share of gross domestic product, lasting for three years, adds as much as 0.5 percentage point to 10-year note yields, according to a 2005 study by the National Bureau of Economic Research.

Volcker, Greenspan

Peter G. Peterson, the chairman of Blackstone Group LP, saw the same outcome in his 2004 book ``Running on Empty: How the Democratic and Republican Parties Are Bankrupting Our Future and What Americans Can Do About It,'' published by Picador Books (241 pages, $15.00). Peterson in 1992 co-founded the Concord Coalition, a group advocating lower budget deficits.

The rally began on Oct. 1, 1981, after Fed Chairman Paul Volcker boosted the central bank's target for overnight lending rates to a peak of 20 percent to stem inflation that was running at a 14 percent annual rate. The yield on the benchmark 30-year Treasury rose as high as 15.21 percent on Oct. 26, 1981.

Treasuries gained through the 1980s and 1990s as Volcker and his successor Alan Greenspan brought consumer price increases under control. Greenspan reduced inflation below 4 percent.

`The Competitive Market'

The 13 1/4 percent bond due in 2014 that the government sold on May 15, 1984, returned an annualized 24 percent. The S&P 500 returned 13 percent, including dividends, during the same period. Bonds gained more than shares of Motorola Inc., DuPont Co. and Duke Energy Corp.

Foreign investors and central banks also drove down U.S. yields by doubling their holdings of Treasuries to $2.1 trillion in the five years ended February, according to Treasury Department data.

``It's the triumph of the competitive market,'' said Edward Yardeni, who coined the term ``bond vigilantes'' in 1983 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds and driving up government borrowing costs. He now heads Yardeni Research Inc. in Great Neck, New York.

`Greatest Bear Market'

Yamada in 2001 correctly predicted 10-year Treasury yields would range between 3.5 percent and 5.5 percent for several years and has been right so far this year in forecasting that gold prices would rise.

The benchmark 4 5/8 percent 10-year note was 4.66 percent as of 11:15 a.m. in London, according to New York-based bond broker Cantor Fitzgerald LP.

The three previous shifts from declining rates to rising ones in the 206-year history of U.S. yields lasted two to 14 years, Yamada said. She analyzes trends using a mixture of interest-rates on foreign loans to the republic in the late 1700s, yields on New England municipal bonds in the 19th century, and high-quality corporate and Treasury yields in the past 100 years.

The rise in bond yields from 1946 to 1981 ``was the modern world's greatest bear market in bond prices,'' said James Grant, publisher of Grant's Interest Rate Observer in New York. The decline in yields to four-decade lows in June 2003 ``began what may prove to be another long-lived march upward, and will probably carry longer and further than people can imagine.''

`Pedestal With Alchemy'

Technical analysis was used by rice farmers in 17th-century Japan to monitor and forecast crop prices. It was popularized by Charles Dow, creator of the Dow Jones Industrial Average in 1896. Technical analysis is based on the theory that a chart of the price of any asset or index contains clues about future movements.

Burton Malkiel, a Princeton University professor, criticized chart analysis more than thirty years ago. In his 1973 best-seller, ``A Random Walk Down Wall Street,'' published by W.W. Norton & Co. (414 pages, $19.77), he wrote that ``under scientific scrutiny chart reading must share a pedestal with alchemy.'' Malkiel was traveling and didn't respond to a request to comment.

``Whether the blue line crosses the red line matters very little to us at Hoisington Management,'' said Lacy Hunt, chief economist at the Austin, Texas-based firm. Hoisington oversees almost $5 billion of Treasuries and has beaten the Lehman Brothers Aggregate Bond index by 2.5 percentage points a year on average over the past five years.

Resume Decline

Hunt says Treasury yields will resume their decline, pushing 30-year bond yields to a record low of 3.5 percent in the coming years as economic growth slows in response to the Fed's 17 interest rate increases since June 2004.

Some chart readers say the rally in Treasuries ended two years ago. A line drawn from the 10-year note's yield peak of 15.8 percent in September 1981 through the December 1999 high of about 6.9 percent was broken as the yield rose in August 2005.

``When I go out to a client I bring a long-term chart like that,'' said Walter Burke, a technical market strategist at Merrill Lynch & Co. in New York. It ``certainly indicates the trend is trying to change.''

To contact the reporter on this story: Elizabeth Stanton in New York at

Last Updated: April 23, 2007 06:20 EDT

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