The Bond Market’s “Return To Normalcy”

President Warren G. Harding made the term “return to normalcy” famous in the 1920 presidential election when he used the phrase as a campaign theme, promising to bring America back to what it was prior to World War I and the Spanish Flu pandemic, which gripped the nation and the world from 1918 to early 1920. Some people said that Harding should have used the word normality instead of normalcy; but Harding, a former newspaper editor, stuck to normalcy; and the catchphrase entered the pantheon of American political slogans.

President Warren G. Harding

Warren G. Harding, President 1921 – 1923

Today, as we reach higher levels of vaccinations, with three vaccines now available and possibly more coming, the markets have started returning to normal. Of course, we are not seeing the trend just in financial markets but in everyday life, too, with the re-opening of the economy (admittedly at different paces in different parts of the country); and we view it in restaurants and in limited attendance now at sporting events, church services, etc. More important is the “forward” pace of economic activity, where people are booking travel plans for later in the year and into 2022. If you are skeptical, try booking a cruise for 2022.

How is this “return to normalcy” reflected in the bond market? We can look at this in several different ways.

The Bond Market’s “Return to Normalcy” 10yr Chart

Here is the nominal yield on the 10-year US Treasury bond yield going back a couple of years. At over 1.6%, the yield is back to where it was before the country slid into the pandemic in March of 2020. We can see the rise since the summer of 2020, when the yield stood at 0.5% in August. We see the rise continue through the fall, anticipating a Democratic win in the presidential election (and discounting more stimulus, which we now have). Then we see a resumption of the rise in yields after the Georgia Senate election in January, which meant that the Senate would be in Democratic hands, along with the White House and the House of Representatives. (See Cumberland Advisors Market Commentary, “The Blue Wave and the Bond Markets”). Some publications have characterized the rise as a “bond market rout.” We would beg to differ. We think this is a return to where we were prior to the pandemic. From a reference standpoint, the 10-year Treasury yield stood at 1.9% at the START of 2020 and the 30-year Treasury yield stood at 2.4% – just about where the 30-year yield is now. So, this return to normalcy is still in play, but we are clearly back to where we were pre-pandemic.

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Disclaimer: The preceding was provided by Cumberland Advisors, Home Office: One Sarasota Tower, 2 N. Tamiami Trail, Suite 303, Sarasota, FL 34236; New Jersey Office: 614 Landis Ave, Vineland, NJ ...

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