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The Bond Bear Growls

By James Cielinski, CFA

James Cielinski, Global Head of Fixed Income at Janus Henderson, explores what a rising yield environment might mean for investors.

Epitaphs are being written daily about the death of the 35-year-old bond bull market. Could the long-feared bear market be upon us, given the rapid ascent of yields? Led by the U.S. and Europe, 10-year yields are higher by 67 and 36 basis points (bp), respectively, over the last five months.1

There are few more emotional terms than "bear market," but it is important to define what this term really means. Investors should be less concerned about terminology and more about what a rising yield environment might look like, how it might impact returns and what investment strategies stand the best chance of succeeding in this environment. In fact, the range of potential interest rate outcomes is more manageable than many fear.

Interest Rates Bottomed in mid-2016

We have already been in a bear market (of sorts) for the last 18 months. Developed market government bond yields troughed in the summer of 2016. You would be forgiven for not appreciating the significance of this. Total returns from government bonds were positive in both 2016 and 2017 (see Exhibit 1); hardly the definition of a classic bear market! Results were even better if one owned corporate or emerging market bonds. And for those that navigated the volatile, uneven rise in rates, it was even possible to produce some very robust investment returns.

Exhibit 1: Yields on the Upswing - G7 Global Government Bond Index

Source: Bloomberg, yield to worst and total return for ICE BofA Merrill Lynch G7 government index, in local currency terms, as of February 12, 2018. Past performance is not a guide to future performance.

The secular arguments for low interest rates have been

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Comments (4)

Windy Hill profile picture
James -- you say " . . . and the mammoth debt overhang have relentlessly pushed the equilibrium level of rates lower. "

I assume this refers to capacity/desire of corporate issuers to increase supply. But what about government issuers, and particularly the US Treasury? I saw a DB forecast that US Treasury supply will increase by $500B (50% over 2017) in 2018 and another $500B in 2019. Won't this challenge the ability of the market to absorb the increased supply without higher rates (even if inflation expectations remain subdued?)
It's going to be a total of about an additional $1T annually for the next 10 years...and that's just by estimates today. My guess is that unless something radical happens to stop these fools from using the government credit card to pay for everything, it's going to escalate even higher.
Thanks for the commentary.
Great, informative article, but I think the last chart is of questionable value.
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