The bond market is a disaster. Thirty-year Treasury bonds are 36% below their highs since the bear bond market started in 2020.
If you’re feeling a little lost and overwhelmed in this environment — you’re not alone.
Most of us haven’t seen anything like this in our own investing careers. If you’re in your 70s, you might remember a similar time. But for the rest of us, this is something new.
But as history reveals, this market environment isn’t unprecedented. The last time we saw a bond market like this was in 1981.
Truth be told, the bond market is one of the most important stories to be following right now.
By tracking Treasury bonds closely, we can get a better idea of how much longer the pain will linger… and when to expect rising interest rates to reverse.
The Bond Market Through the Decades
Bond markets have very long bear and bull cycles. Take a look at this chart of 30-year Treasury bond futures. This contract began trading in 1977.
At that time, inflation was raging. Interest rates were soaring. This meant bond prices were falling.
After bonds bottomed in 1981, a 39-year bull bond market began. That bull market ended in 2020.
Before the bull market, bond investors suffered through a multidecade bear market (1946 to 1981). After interest rates bottomed in 1946, the uptrend for rates after that low lasted 36 years.
If we look even further back, we see that there was a 30-year bull bond market. In the 1800s, long-term trends in interest rates lasted about 20 years.
Watch Investors’ Risk Appetite for Signs of a Turnaround
As you can see, bonds market trends last for years — and longer bear/bull cycles last for decades.
Interest rates will have shorter moves within the longer cycle, but the trend for rates now is up.
Since bond prices move in the opposite direction of rates — as rates rise, bond prices fall — that uptrend in rates means investors in bonds will suffer losses for years.
One reason for the long-term cycles is the fact that investors perceive risk differently at different times.
In the 1980s, investors began embracing risk. Junk bonds are an example of this. They were developed to fund businesses without strong fundamentals.
As junk bonds became commonplace, startups flourished, and acquisitions became common. In this environment, stocks soared. Interest rates fell because investors were willing to accept risk.
This reversed an aversion to risk that prevailed since World War II. Investors in that era were scarred by memories of the Great Depression. They demanded compensation for risk, and that pushed interest rates up. Then inflation picked up, and rates reached all-time highs.
Traders’ perception of risk is an overlooked factor in the current market.
You see, investor risk appetite will determine how long this bond market trend lasts. That’s the crucial factor in determining when the uptrend in rates will reverse.
Today, investors face losses in bonds and stocks.
Investors remember losses, especially the large ones that cause pain to last. That pain will affect how investors make decisions for years to come.
With just two years into this bear bond market, we likely have a long way ahead of us before the bond market bottoms again and rising interest rates reverse. For now, we face a new era of rising rates and inflationary pressures.
But this doesn’t mean doom and gloom for everyone. With the right short-term trading strategies, we can still prosper in this environment.
While long-term investors are struggling through the worst of times, short-term traders get a chance to score some of their best trades.
The key is to focus on the short-term trend that will include sharp rallies against the longer-term downtrend. Those rallies are golden profit-taking opportunities that we’ll be watching closely for in True Options Masters.
Michael Carr, CMT, CFTe
Editor, True Options Masters