In recent weeks, along with the sharp rise in Treasury rates, came a chorus of bond bears proclaiming yet again the end of the multi-decade bull market and the ushering in of a new bear market in bonds. It is the same story we’ve heard every year since 2009. Maybe the fifth time will be the charm. But for those who think we are on the cusp of a new multi-decade bear market in bonds, I would like to share the following chart.
I recently wondered the extent to which the Consumer Price Index (CPI) and the 10-year Treasury have tracked each other from a long-term, directional standpoint. I started with 1965, the year after which inflation began its dramatic move higher before peaking in 1980. Correlation certainly does not imply causation. But the CPI and the 10-year Treasury have shown some serious directional correlation over the past 48 years.
Moreover, during the past several decades, the U.S. has shifted to a more debt-based, credit-centric economy. Businesses, in order to regularly be able to push through price increases, have (whether they realized it or not) depended on a consumer’s willingness to leverage up the personal balance sheet to purchase ever more goods and services (most of which were nice-to-haves rather than need-to-haves). Today, however, there seems to be a new focus among everyday people of using debt mainly as a means to acquire the need-to-haves rather than also being the means to splurge. When combining that with tepid wage growth trends, powerful deflationary demographic forces, deflationary technological advances, and a labor market that seems unable to produce sufficient well-paying, full-time jobs, it seems more likely that the CPI will remain low for a long time to come.
What might change that? A bull market in commodity prices could change that. But as I’ve mentioned in previous articles, those in power can control the highly leveraged commodity futures markets if they want to. It is simply a matter of having the will to hike margin requirements to the levels necessary to bring prices back down to earth. Of course, being able to do something and being willing to do something are two different things. But when thinking about the risk of higher CPI, keep in mind that commodity prices can be controlled much more easily than many realize.
When it comes to Treasury rate movements, in recent weeks, the market has certainly shown a willingness to drive rates higher despite no near-term risk of the Fed raising the federal funds rate or of a dramatically rising CPI. But I highly doubt that a move higher in rates is sustainable over any extended period of time without the Fed eventually raising the federal funds rate or without CPI taking off to the upside.
Even though correlation does not imply causation, when a chart that spans nearly 50 years shows the kind of correlation that the chart in this article shows, it is at least worth paying attention to. For a secular bear market in bonds to become a reality, I think we will need to see a long-term, sustainable change in economy-wide inflation levels. And for that to happen, we will need to see a prolonged strengthening in wage growth and the quality of jobs being produced. Until then, the bond bears are likely to continue striking out with their predictions.
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