The Treasury Rally Is Set To Continue - Here's Why

I would continue to expect lower bond yields based on the leading indicators of growth and the leading indicators of inflation (not covered here), which are also pointing lower.

Another week has gone by with another slew of research notes, TV pundits, and media talking heads declaring the Treasury rally to be overdone, exhausted and nearing a top.

I am amazed at why there is such a desire to call a top in bonds, or a bottom in interest rates, especially when the fundamentals don't support it.

For those that have been following the work we publish at EPB Macro Research, you know that we have been calling for lower interest rates since early 2018 and reinforced that call when the 10-year Treasury rate was making it's scary rise to 3.25% in October of 2018.

In fact, here is what I wrote back in October 2018:

"If you buy long-term bonds today, it will prove fruitful as we have not yet seen the secular low in interest rates. Buying a 3.35% 30-year Treasury (TLT) (EDV) with the potential for new secular lows in interest rates over the next several years has enormous profit potential. I am still a buyer of the long bond."

Fast forward and we have seen a new secular low in the 30-year Treasury bond, which fell below 2.0% and currently sits at 1.99% as of this writing.

(Click on image to enlarge)

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Source: Bloomberg, EPB Macro Research

Since that call in October, long-term Treasury bonds have risen by more than 40% while the S&P 500 has dramatically lagged behind, increasing by only 7.1%.

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Bloomberg, EPB Macro Research

Why have so many missed this call and continue to argue for a rise in yields? Firstly, many pundits misunderstand the dynamics between growth, inflation and bond yields.

The first issue is that many analysts are not focused on the "rate of change." The bond market is not concerned with anyone's personal assessment of inflation or growth or subjective descriptions such a "good", "solid" or "okay".

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