Bullish U.S. bonds

November 18, 2016 09:00 AM
The 30-year U.S. Treasury bond market’s multi-decade bull market may not be over just yet.

The 30-year U.S. Treasury bond market’s multi-decade bull market may not be over just yet. Fundamentally, with other sovereign bonds (from major countries) yielding just next to nothing—and in some cases negative yields — the yield on the U.S. 30-year bond is still highly attractive to large scale buyers looking for a fixed return from a highly solid counterpart, the United States government. 

However, the bond yields have started to increase since the summer of this year. Once the initial fear and shock of the Brexit went away, the stock market rallied, yet the bond prices were still very elevated. It was perhaps this dislocation alone that caused the bond market prices to fall rapidly, with yields rising. Fundamentally it would be unlikely for the bond market to have a sustained sell-off this year.

Currently, the December ’16 U.S. 30-year bond future is at 164-24; 160 is a very major support level, but there are additional support levels that must be taken out before that test (see “Bond bottom,” right). The bonds will stay in a range between 162 and 168 throughout the rest of this year. The next major range is between 153 and 160, but unless we start to see inflation increase at completely unexpected levels, bond prices will be supported on any major dip.

The fundamentals of the U.S. stock market do not look that bullish. We have seen multiple quarters of declining earnings. The USD is starting to look bullish again, which could further put a dent in earnings. 

For this reason, bonds will remain somewhat neutral, if not bullish.

The overall recent trend of central banks around the world is to try to stimulate their respective economies by pressing down interest rates, which is supposed to encourage people to invest. For this reason, bond prices are still in a fundamentally bullish environment. The point being, regardless of how low U.S. long-term Treasury bond and note yields are, they are better than the alternative, both in terms of yield and reliability. Only when the U.S. Federal Reserve has hiked rates twice more will the bonds fundamentally shift into a “sell the rally” environment. For now, the bond bulls still are in charge.

About the Author