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We Continue to Monitor this Bond Market Megatrend

CAMS Weekly View from the Corner - Week ending 2/9/24

February 12, 2024

Back in the summer of 2023 we decided to finally open up the topic of a major historical shift in the bond market that we offered as a change in a long-standing trend, i.e. the megatrend. 


By the time we opened up this topic it had already been a year in the making.  We ourselves thought some time should pass to help ensure this wasn’t some sort of a knee-jerk response that turned out to be an aberration of the long-standing mega trend.


Shifts in megatrends are difficult to grasp psychologically because in light of their long duration they become the backdrop of the socioeconomic landscape - part of the fabric of society if you will.  Also in light of their length in time they also become multi-generational which further entrenches them within the societal backdrop. 


They become so entrenched the masses rarely if ever even question that it could be any other way – it is all we know – how could it change? 


This is particularly true for the relative youth of the multi-generational makeup because it is literally all they have ever known.  To suggest to them it could be different, vastly different, seems laughable if not outrageous.


Importantly though, throughout history, all trends change even the megatrends. 


The Bond Market Continues to Offer this Megatrend is Over


Bond market participants adjust yields (think interest rate) for bonds by pushing bond prices higher or lower.  If bond market participants believe X bonds should be giving a higher interest rate these bonds will be pushed down in price within the bond marketplace. 


As bonds move lower in price their yield (interest rate) moves upward.  For whatever reasons, usually many reasons, bond market participants feel the bonds in question need to pay a higher rate to offer fair compensation relative to the risk a participant takes on to hold them. 


Keeping this very simple this is no different than if you as an individual agreed to loan money to X person or entity.  Assessing the general risks of the loan is how you would determine what level of interest rate you would need to receive to compensate you for the risk of loaning out your money and holding their note/bond in your possession. 


Taking this just one step further to offer an experiential understanding here, if you then offered this bond for sale to X person or entity (you just took it to a “marketplace”) they would do an updated assessment of risks and upon doing offer you a lower amount than the face value of the bond. 


Here they are determining risks have increased and they need to see a higher yield (interest rate) so by offering you a lower amount than face value the stated interest rate to be paid as listed on the bond agreement will yield a higher rate to the new owner because they paid less than the face value of the bond. 


This is how market participants “change the interest rate” if you will of an already issued bond.  By pushing the price lower the bond’s contractual stated interest rate yields more interest to the new owner.


With this bond market participants dramatically changed, on a trend basis, what interest rate they would need as fair compensation to hold the well known benchmark 10 Year Treasury bond. 


We say benchmark because it is used as a benchmark interest rate and can play a role in setting other interest rates within the financial system.  Offered simply and succinctly, the 10 Year yield and its trend is a big deal that should always be noted.

Above is a 50 year chart to fully depict the megatrend for 10 Year Treasury bonds that had been in place since 1981.  Per our well established red downtrend line we can see interest rates continued to trend lower and lower over time. 


Importantly, like all trends, the above trend always offered an ebb and flow whereby rates would move lower then would offer a trend attempt upward only to be turned back with an even lower interest rate prevailing.  Over decades this megatrend stayed in place as ever lower rates unfolded.


Looking to the far right portion of the chart we see this all began to change in 2021 with a violent upturn that for all intents and purposes never looked back. 


Its multi-decade trend behavior changed notably.  Bond market participants were pushing prices consistently lower as they were requiring higher yields to compensate for X risks of holding these bonds.


Then as we crossed into early 2022 participants did what they were not able to do since 1981 – they took out the downtrend line as they pushed interest rates easily up through said line.


From 2021 on through 2022 note the overall powerful change in behavior.  Interestingly, this is often how true trend changes occur.  That is, powerfully in the opposite direction.


Strangely, a powerful shift in the opposite direction further adds to a general belief that what is unfolding is a short-term knee-jerk type reaction to X scenario.  When it comes to megatrends ending this is especially true because, as shared earlier, it just doesn’t seem possible that said trend can be over. 


The powerful upward move of these yields by bond market participants coupled with the ease of change of trend actually adds credence to this change in trend. 


Shared to the point, bond market participants are offering the multi-decade downtrend in interest rates is over. 


This does not mean interest rates will never move lower but rather a series of ever lower rates is what has ended per their trend messaging.  With this a series of ever higher interest rates, over time, (i.e. a new megatrend) is shaping up to be in place.  Time will tell her story on this front. 


Enter Bond Market Participant Messaging    


At this juncture we can only call this a steadfastness to insist on high yields to be compensated for X risks – think price inflation risk and issuance risk to name only two


On both fronts we have shared perspectives through various editions on the price inflation landscape as well as the off-the-charts increased indebtedness by D.C. officialdom.  Said indebtedness is so large (and growing rapidly) the U.S. Treasury is now paying over $1 trillion in interest payments on an annual run rate.  An astonishing level.


The double whammy of continued price inflation challenges coupled with unhinged debt usage and issuance will surely play significant roles with bond market participants assessing interest rate risks and demanding an on-going high level far above that which the previous multi-decade downward interest rate megatrend had the citizenry accustomed to.


Time will tell but for now bond market participants seem to be steadfast with their concerns of the above underlying dynamics. 


To end with a touch of sarcasm, who would have ever thought that endless money printing and massive debt usage/creation by D.C. officialdom over recent years/decades would offer downstream consequences eh.  When officialdom offers we can print and indebt without consequence – don’t buy it – there are always consequences as history informs ad nauseam. 

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

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