The U.S. Treasury Bull Market Has Barely Started

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The bull market in U.S. Treasury bonds is in full swing and there is plenty more return to be made.

Two articles I wrote last October for Advisor Perspectives (here and here) identified the business-cycle peak in long-term U.S. Treasury yields. Yields have fallen dramatically from those points, generating significant capital gains for Treasury bond holders. The chart below shows when those articles were published and the path of U.S. Treasury yields before and after:

I identified the inflection point by comparing yield and economic behavior to the prior three recession eras – essentially taking historical lessons from the shape of the yield curve, the housing market (the best leading indicator), and business cycle length (I define a “recession-era” to be the period before, during, and after a recession in which U.S. Treasury yields are falling. The term is used to include the negative economic climate before and after a recession).

This method is notably different from the standard day-to-day financial commentary. The standard approach processes new information in near isolation from the past. This information is then reduced down to a few popular narratives to describe what is moving the market. The problem is that these narratives are not discussed as long as the phenomenon is present, are just a small subset of what is going on in the world, and are too short term to help trading the market.

For instance, the idea that U.S. rates need to fall to close the gap between U.S. and other developed economy sovereign yields (say Germany) has become popular in the last week. But this wide gap has been present (and greater) late last year. In another example, Brexit has moved off the front pages temporarily, but it is still the same unresolved situation. While of course it is important to be aware of what others are talking about, this approach often misses the reality of the broader business cycle.