Tidal Forces

Government bonds notch their worst quarter in 157 years... and what it means for markets...

(Source: Getty Images)

Bill Bonner, reckoning today from San Martin, Argentina...

There was so much going on, these last couple of weeks. It was easy to get waylaid, or delayed. Each headline demanded attention. Was it important? Or just more nonsense?  

• Russia, Russia, Russia – bad, bad, bad. Ukraine, Ukraine, Ukraine – good, good, good.

• Mortgage rates are touching 5% again. Is the great “refinancing machine” breaking down?

• Tax the rich; they need to pay their fair share! But wait, more than half of American households – 57% – paid no federal income tax last year. What’s fair about that?

• And there’s the $5.8 trillion budget proposal… the biggest spending extravaganza ever… the largest tax increase ever; even the Pentagon, which has wasted trillions over the last 60 years, is getting more loot.

Oh… and Will Smith smacked Chris Rock!

And here’s a story from MarketWatch:

U.S. government bonds are about to complete one of their worst quarters for total returns in the past 157 years.

That’s according to Deutsche Bank AG’s Jim Reid, head of thematic research, who cites data stretching back to the U.S. Civil War. Thursday will mark the end of what’s set to be the worst quarter for the 10-year U.S. Treasury since the early 1980s, he says. The only other period with even worse total quarterly returns for 10-year Treasurys or their equivalents was the fourth quarter of 1931, during the Great Depression, according to data since 1865.

Does it matter?

Yes, it probably does.  

Choppy Waves

As you recall, there are always choppy waves on the surface of the markets. And there are big tidal forces underneath. The surface chaos hardly matters. But the ‘yield cycle’ – like the movement of the Earth itself – changes water to ice… like sunshine to driving snow.

In July of 2020 the yield on the benchmark 10-year T-bond reached a record low at 0.51%. Yesterday, it was four times higher – at 2.4%. This could be more surface ‘chop.’ Or, more likely, the tide has turned.

The last epic low tide in interest rates was in the late 1940s. Then, the economy boomed and interest rates headed up. They didn’t reach a top until nearly 40 years later – in 1980. It was then that Paul Volcker – eager to get control of inflation – pushed up the Fed Funds rate to where it briefly touched 20%.

Tops and bottoms are uncommon. They are like the smartest kid in the class… and the dumbest. In between, are most of them. Neither smart nor dumb… it’s not clear which way they will go in life.

We only find out years later… when they run for Congress; then, we discover that they are complete morons.   

Bottomed Out

Now, 40 years after the last high in yields, interest rates have bottomed out again.  And, just as Paul Volcker pushed them up to smother inflation… Jerome Powell and his merry band of economic ignoramii pushed them down to inflame it. So what’s ahead? Might investors now expect another long period – 40 years perhaps? – of rising yields?  

Will zombie corporations – that depend on rolling over debt to stay alive – go broke? Will jobs be lost as companies cut payrolls to survive? Will investors turn away from overpriced FANGMAN stocks… risky ‘new tech’ companies… ‘meme’ favs... NFTs… cryptos…?

In practical terms, we suggested to readers yesterday that, if the yield cycle has turned, mortgage rates may rise for a long, long time. That would most likely mean falling (real) house prices, too. So, sellers may suffer 40 years of declining prices… and wait another 40 years for prices to recover to today’s bubble highs. The next high in house prices? Plan for it – in 2100!

It might be better to start packing boxes now.

Regards,

Bill Bonner

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From the Desk of BPR Investment Director, Tom Dyson…

Yesterday we saw how investors are now behind 33% of home purchases in the USA. Sticking with the real estate markets, today, we see mortgage rates soaring... from 3% a few months ago to near 5% today.

Nationwide, house prices are up 32% since the pandemic started. But with 1-in-3 houses being bought by investors and mortgage rates soaring, who's going to drive the next leg of house price appreciation? Or is the bubble about to burst? And how will this impact our investments going forward, in particular regarding the BPR portfolio strategy?

We're keeping an eye on the unfolding situation and will be updating BPR paid subscribers accordingly (weekly notes from me every Wednesday and from Dan every Friday). If you'd like to join us, please do so right here...