Forget Dow 20K, or euro parity, or $60 oil, says Bill Gross in his monthly outlook. The most important number is 2.60%, and if the 10-year Treasury yield tops that level, a secular bond bear market has begun - which naturally has massive implications for whether happiness or despair for equity investors lay ahead this year.
Neuberger Berman cut its outlook for U.S. government paper to underweight just after the election. Though still bearish, the team notes the sharp rise in yields over the past few weeks has brought the paper closer to fair value.
Helping Treasurys: The "gravitational pull" of still accommodative policies in Europe and Japan.
The outlook for developed-market debt (ex-U.S.) was also cut to underweight following the election and it remains there headed into 2017.
For high-yield, they maintain a neutral outlook, noting spreads are still within historical ranges despite the big rally this year.
The global bond rout picks up steam this morning, with the 10-year Treasury yield up another 5.3 basis points to 2.441%, the 10-year Bund up 4.8 bps to 0.324%, and 10-year yields in Italy, Spain, and the U.K. higher by similar amounts.
Rolling around the minds of fixed-income investors is incoming Treasury Secretary Steven Mnuchin's consideration of locking in still-historically-low interest rates through the issuance of 50- or 100-year government bonds. At the pace rates are climbing, he better hurry.
If the previous period was characterized by increasing globalization, relatively innocuous fiscal policies, and sluggish domestic growth (along with low inflation and falling bond yields), says Dalio, a Trump administration is likely to see decreasing globalization, aggressively stimulative fiscal policy, and increased growth (along with rising inflation and bond yields).
There's a really good chance, he says, that we're at a point of one of those major shifts - think the 1970-71 shift from the low inflation of the 60s to the runaway prices of the 70s, or the 80s shift back.
The bottom line is that things won't be good for bonds, and then the question becomes at what point does that start to pressure other asset prices.
"I would like to come back as the bond market, you can intimidate everybody," famously said James Carville in the early 90s as every fiscal move made by his boss thought to be at all inflationary was met with a selloff in long-dated government paper.
The bond vigilantes are seemingly back, and apparently telling the president-elect to go easy on the deficit spending - taking the yield on the 10-year Treasury from 1.70% Tuesday night to as high as 2.28% earlier this morning.
"Trump has all these big spending plans, but he doesn’t have the revenue to pay for it,” says Allianz's John Bredemus, in a quote that could have been lifted from Pete Peterson, circa the early 90s.
"The dam is breaking, you can feel it," Jeff Gundlach tells Reuters, referring to the recent string of modest S&P 500 declines. He sees another 5-10% downside for the index.
Meanwhile, DoubleLine's $61.6B Total Return Bond Fund (MUTF:DBLTX) (ETF cousin: TOTL) suffered its first month of net outflows since January 2014, with $33.2M pulled. The $7.7B Core Fixed Income Fund (MUTF:DBLFX) had net inflows of $166.5M in October, bringing YTD inflows to $2.1B.
Having been vocally bearish on bond prices for months, Gundlach isn't surprised at least some are heeding his warnings and pulling money out of fixed income offerings.
Bond funds have seen nearly $200B of inflows this year versus outflows of $60.5B for equity funds, but the sharp rise in rates post-Labor Day spooked some as the fixed-income funds experienced outflows for the first time in ten weeks.
Looking closer at the bond fund category finds money moving favoring shorter-term maturities rather than further out on the curve. Whether it's a trend or not remains to be seen as rates at the long end have reversed sharply lower this week.
At 1.61%, the 10-year Treasury yield has about returned to its level at the start of September.
The extra yield that investors demand to own 30-year Treasurys rather than five-year notes, a measure of the yield curve, increased for a ninth straight day today. That’s the longest streak since 2012.
Traders are favoring shorter maturities, anticipating the Fed will continue to keep interest rates in check, potentially stoking inflation and eroding the value of debt maturing decades in the future.
The last time the yield curve steepened this quickly was Aug. 2012. At the time, primary dealers were offloading billions in 30-year bonds to the Fed as part of its debt-buying program.
"This bond story is not dead by any means," says Western Asset Management's Robert Abad. American growth and inflation are likely to remain "muted," and thus a bet that U.S. interest rates will remain structurally low "is a good trade," he says.
"It is a natural disposition" of investors to take some profits, says Templteton's John Beck, reminding bonds put in a big rally prior to the current rout. "Where is the catalyst that is immediately going to change the interest rate path?"
Included in the report is an amazing chart showing real returns by the decade in developed bond markets. Prior to the 1980s, decades of negative returns were well mixed in which those of positive returns across every economy. From 1980 to present, though, there's not one period of negative returns for even one developed-economy bond market. Not one.
The best case scenario as domestic financing markets start to struggle will be some form of capital controls. One might argue this is already occurring through new regulations all-but-forcing banks, insurers, and pension funds to buy domestic paper for reasons other than value.
Worst case is a "hard break" in which a major country defaults on its debt.
Neither scenario is likely to be favorable for the owners of long-dated fixed-income assets.
Opining on the markets and the economy in his latest webcast, Jeff Gundlach says the Fed is becoming increasingly irritated with Bloomberg's World Interest Rate Probability (WIRP) function. The central bank, he thinks, wants to show its independence from traders by hiking rates even though WIRP is below 50%. Typically, it would take a WIRP reading of above 70% to see a Fed move.
Seemingly contradicting himself, Gundlach also says he's sensing a whiff of inflation in the air, and he's thus chilling towards bonds.
He's still bullish on gold and the companies that dig it out of the ground.