MBS Live Day Ahead: Time to Talk About End of Bonds' 35yr Run?

Big moves in bond markets always result in big conclusions from all manner of market participants.  Whether it's Chief Strategist at some big bank, a money manager for a big bond fund, or even a financial news commentator, I've seen a rampant increase in bets being made on the status of the long-term bull market in bonds.  

For today's purposes, "long-term" means 35 years, give or take.  It's impossible to miss if you've ever looked at a chart of bond yields going back to the 80's.  Today's chart starts with a zoomed in view of that long-term chart (going back to 2006), which will let us more closely examine recent trends.  

If bond market critics want to talk about these trends being broken, that's fine.  They're even within their right to discuss the possibility that the breaking of the more recent trends hearkens a showdown with the longer-term trends.  But no one has any leg to stand on if they're claiming that the long-term bull market is definitively over.  

As the chart shows, the long-term bull market can't possibly be over until and unless things get much worse.  Yields would need to break above the upper white line (around 2.66 now).  Otherwise, recent weakness will simply look like another correction within the long-term trend.

To be very VERY clear, the purpose of this commentary is NOT to suggest complacency or to lead you to think that we're due a nice, friendly bounce back toward lower rates.  Indeed, rates could go much higher without confirming the end of the long-term trend (like when boundaries were pushed in 2006, 2000, 1994, etc).  Rather, my point is to remind everyone that the long-term trend is too big and too pervasive to imagine that we've seen any definitive change due to a 3-day sell-off, huge though it may have been.

In other words, yes, things have clearly moved in an unfriendly direction extremely quickly.  And yes, if such a move continued, we could eventually be facing a showdown with the upper boundary of the long-term range.  But we're nowhere close to such a showdown just yet.  

You could glean one of two messages from this, depending on your outlook:

1. "Shucks... I guess yields have room to run even higher without violating the long-term trend."

2. "Phew... I guess even if rates continue higher that we don't need to abandon hope that they can come back"

Either way, I would recommend maintaining a healthy respect for the risk that rates CAN continue higher.  I wouldn't necessarily assume that we're due a bounce simply because bonds have sold off so much, so quickly.