What Would You Have Done?

Let’s analyze the formation of the bond bull market which began in 1982. We’ll use the US 10-year as proxy. Here it is in all its glory:

The 60’s and 70’s saw bond yields run from a low around 4% to over 10% at the tail end of the 70’s. For bond bulls, this was a period of time more painful than being trapped in a car listening to Mariah Carey for 3 hours straight (I had a torturous childhood and still wake in a cold sweat sometimes).

The inflation crowd had the reigns and rates ran and ran with bonds getting absolutely torched

…and then BAM!

Bonds came out of the gate like they’d been juicing on steroids while training with Ben Johnson on the sly. Yields collapsed from just over 13% on February 22nd, 1980 to 9.5% on June 20th. Only 4 months! A massive move in the scheme of things.

Now, to be fair, I wasn’t there when all this happened as I was still just a young snot annoying my mother. But I’m pretty darn sure that this move would have brought a few questioning folk over to the “inflation is no longer the risk” camp. But likely not many.

It also would have given pause to the bond bears. A little of that, ”Holy mother of Mary! What the hell? That wasn’t meant to happen!!” certainly crept in there. Which is, of course, what happens when you’ve been short bonds with leverage and just got margin called (and you can bet your hat many were leveraged short bonds because hey look, it’s been profitable for so damn long).

It’s an observable truth that leverage typically rises as market participants’ confidence in linear trends coincides with those same trends, despite fundamentals having already changed. We humans just can’t help ourselves.

The very few bond bulls out there thought, “Hey, this is it!”. They were finally going to get some luvin’ as they’d got more than a fleeting glance. There was a flash of a thigh and a wink from their bond positions.

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Disclaimer: This is not intended to render investment advice. None of the principles of Capex Administrative Ltd or Chris MacIntosh are licensed as financial professionals, brokers, bankers or even ...

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