Let’s be clear about something right up front: I’ve been wrong about the direction of long-term interest rates. They’ve fallen, rather than risen, for the past year. Long-term bond prices, which move in the opposite direction of rates, have climbed precipitously.
I can take some consolation in the fact shorter-term rates have done what I thought they would. Five-year yields are still well off their 2013 lows, and two-year yields have more than tripled off a low base.
Plus, junk bonds and emerging market bond ETFs — which I warned about vociferously ^mdash; lost value in the past couple of years. And I think we can all agree that my calls on the euro have been spot on!
But what the heck happened with bonds? More importantly, since it’s the future that really matters, where do we go from here? Can anything stem the bond rally?
|The turnaround in oil prices could be signaling a turnaround in investor sentiment toward foreign growth.|
Well, it hasn’t been a U.S. recession or lousy economic data holding rates back. You can say what you will about the accuracy of the government’s economic data — and I know it has problems. But month after month, quarter after quarter, every piece of data has shown a recovery from the 2008-2009 recession.
It hasn’t been as robust as we all would like. But we are in nowhere near as bad shape now as we were at the end of 2008, the last time 30-year Treasury yields were going for these levels (2.42 percent, give or take).
Consider: Figures from the ADP Research Institute on Wednesday showed we added 213,000 jobs in January. That was down somewhat from 253,000 in December, but a fifth month in a row above the 200k level. Official Labor Department figures show unemployment running around 5.6 percent.
We’ll get another update around the same time you receive this email. But assuming we don’t get some huge surprise out of left field, the recent figures are far better than what we saw in the Great Recession. We lost a whopping 826,000 jobs in the worst month of that collapse, while unemployment soared to a peak of 10 percent (almost 20 percent if you include discouraged or underemployed workers).
We also just learned that GDP grew by 2.6 percent in the fourth quarter. Though down from the 5 percent rate in the third quarter, that’s still comfortably in expansion territory. For comparison’s sake, the economy shrank at an 8.2 percent rate in the fourth quarter of 2008 and a 5.4 percent rate in the first quarter of 2009.
So what happened?
Two things. Foreign economies petered out … and central banks the world over launched the most ambitious money printing and bond buying programs ever. That includes full-scale negative interest rates in the euro zone and a handful of non-euro-currency countries.
As a result, we’ve seen “Japan-ification” of European yields. Core European yields have plunged into negative territory, or close to it — and U.S. yields have been dragged down with them.
Think of it as a giant “relative value” trade. A yield of 1.82 percent for a 10-year Treasury sounds lousy. But it sure as heck beats the 0.36 percent yield you can get from a similar maturity German bond, or the 0.37 percent yield you get in Japan.
So fixed-income investors who have to buy bonds are buying U.S. Treasuries. That’s forcing a convergence between Treasury yields and foreign government yields despite completely different growth trajectories.
What can break these insane linkages? Ironically, the single biggest driving factor could be foreign growth. Any improvement in the Chinese economy, the Japanese economy, or the European economy would likely have a much bigger impact on our yields than even better news here. That’s because it would get their yields higher than zero — possibly by a lot.
Is that likely?
Well, we haven’t seen much encouraging news lately. But the turnaround in oil prices, despite Wednesday’s correction, could be signaling a turnaround in investor sentiment toward foreign growth. Indeed, Japanese government bond yields are starting to perk up — and we just saw 30-year Treasury yields spike a quick 20 basis points.
Every marathon starts with a few short steps. So maybe this is finally the beginning of a march toward higher rates. Savers can only hope!
Until next time,
P.S. Millions have seen me or our team of financial experts on CNBC, CNN and NBC News or in the New York Times or Wall Street Journal. The media turn to us simply because our forecasts are amazingly accurate. For my latest forecast and details on what you must do immediately — before February 28 — to protect and preserve your wealth, click here for my FREE report.