EC Bonds Are Up Nearly 40% In The Past 9 Months - There Is Still More To Go

While most of the media and analyst attention has shifted towards the equity market and the large declines in stocks, the bigger and more profitable move has been in the Treasury bond market.

While most of the media and analyst attention has shifted towards the equity market and the large declines in stocks, the bigger and more profitable move has been in the Treasury bond market.

Over the past nine months, the 10-year Treasury rate has plunged from a rate of 3.25% to 1.72%. The 30-year Treasury rate has staged a similar decline which translates to a nearly 40% rise in long-duration Treasury bonds such as ETF (EDV).

10s regular

Source: Bloomberg, EPB Macro Research

I have been bullish of long-term Treasury bonds, highlighting the opportunity in ETFs such as (TLT) and (EDV) for over a year based on the expected deceleration in economic growth and the research on why economic cycles matter.

In a recent note on why cycles matter, which you can read by clicking here, I highlighted seven "up cycles" and seven "down cycles," the seventh which we are currently still in as outlined by the data below.

The cycles, defined using the IHS Markit Global PMI and several factors such as the length of the decline, the magnitude of the decline and the breadth of the decline are outlined in the chart below. Down cycles are from points A to B and up cycles are from points B to A.

global cycles

Source: Bloomberg, EPB Macro Research

We can test the performance of various assets as we did in the previous research note during each up cycle and each down cycle. The results are overwhelmingly clear.

If we look at the return profile of 30-year Treasury bonds across up cycles and down cycles, the results are stunning. When the economy is accelerating, Treasury bonds decline as you'd expect.

During down cycles, when growth is in a phase of deceleration, Treasury bonds soar with an average full cycle return of +25%, greater than 30% better than the S&P 500 during down cycles.

tables

Source: Bloomberg, EPB Macro Research

For months, while Treasury bonds were rising, popular analysts were constantly making the case against Treasury bonds, ignoring the research that shows long-term bonds rise with a 100% positive hit rate during economic cycle downturns.

Now that long-term bonds have rallied nearly 40%, and the move in rates is undeniable, as is the trending direction of economic growth, the narrative against bonds has shifted to one of exhaustion - rates have moved too far too fast.

Those who did not anticipate the decline in rates are now suggesting the move should be over but they are making the same critical mistake as they did during the missed decline in rates - they are ignoring the economic cycle.

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Dan Nicholson 1 year ago Member's comment

Excellent read. Highly recommended.