They reckon benchmark yields are poised to climb to 4 percent over the next 18 months, presenting fresh challenges to investors who have become accustomed to more than 30 years of rising bond prices.
“While the outlook for interest rates is highly uncertain, we feel that the bull market is over,” strategists including Thierry Wizman in New York wrote in a note published Wednesday.
The call comes during a frenetic week for Treasuries, which are sliding as inflation expectations hover near the highest since 2014 following years of doubts about whether prices and wages would increase. The 10-year yield touched 3.093 percent earlier, the highest since July 2011.
Macquarie says yields will be set free by central banks relinquishing their role as the bond market’s biggest buyers for much of the past decade, with U.S. growth, fiscal stimulus, and “normal” wages and inflation acting as short-term triggers. Demographics may also play a role, the strategists said, as the baby boomer generation starts tapping retirement savings stashed in fixed-income.
The reversal will take some adjustment for a market accustomed a relentless grind lower in yields, and raises questions for strategies that rely on historic correlations between bond and equities. “For most of today’s investors, trend U.S. bond prices have only ever moved in one direction,” the strategists note.
It took the bond market decades to recover from the effects of the 1970s oil crisis and inflation that forced yields as high as 15.8 percent by 1981, according to the note. However, those heady yield levels are unlikely to return, Macquarie said.
“Yields are likely to stay well below those seen in the 1970s-90s,” even once a bond bear market begins in earnest, they said.
©2018 Bloomberg L.P.