Is the Bond Run About to End?

• Posted by Greg Harmon
• on February 10th, 2016

Long bond prices have been running higher for over 20 years. There have been a few pullbacks here and there, but like Ian Fleming’s the James Bond franchise, they just get right back up off the ground and keep running. Last fall, after a year of jawboning, the Federal Reserve finally lifted interest rates. This was supposed to kill off this rally. But the Fed controls short term rates, not 30 yr rates. Those are dominated by inflation expectations. And there is none of that in sight.

But still it seems that US Bond prices are reaching critical levels and it is perhaps time for them to fall, sending rates higher. If only for the short term. The chart below gives the story. Bond prices have moved higher in a channel for the entire 21 year period in shown.

But as they make 21 year highs, they are now approaching the top of that channel. Can they push through and break out to the upside? Sure, but what does not show up in the chart is the fact that there is a zero bound on long term interest rates. So prices can only go so far. Well maybe not anymore, but you get the idea.

It is a pretty powerful picture that over 21 years the price of long Bonds could only stay over this rising channel for less than 2 months. There are 252 months in 21 years! That is less than 1% of the time. You can continue to ride the wave higher for now. But it is time to be a bit cautious. 21 years of history suggest that a peak, at least short term, is right around the corner.

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