Earlier this week Daniel Druger and Liz McCormick wrote an article for Bloomberg entitled: “One Hundred Years Of Bond History Means Bears Destined To Lose.” The crux of the article is contained within the following paragraph:
“With the longest-dated Treasuries now yielding less than half the 6.8 percent average over the past five decades, it's not hard to see why forecasters say they're bound to rise as the federal reserve prepares to raise interest rates following the most aggressive stimulus measures in its 100-year history.”
The premise here is simple. With interest rates near their lowest levels on record, they have nowhere to go from here “but up.” This is the consensus of virtually all of the analysts and economists on Wall Street which currently suggests that rates will rise to 3.88% next year on the 30-year treasury.
That was also the belief in June of 2013 when rates did spike on an emerging market bond rout. The majority of the mainstream media, and guru's like Bill Gross, claimed that the “bond bull market” was dead. At that time I wrote an article suggesting they would be quite wrong stating:
“For all of these reasons I am bullish on the bond market through the end of this year. Furthermore, with market volatility rising, economic weakness creeping in and plenty of catalysts to send stocks lower – bonds will continue to hedge long only portfolios against meaningful market declines while providing an income stream.”
Since then rates have continued to be in a steady decline as real economic strength has remained close to 2% annually, deflationary pressures have risen and monetary velocity has fallen. The chart below is a history of long-term interest rates going back to 1857. The dashed black line is the median interest rate during the entire period.
Interest rates are a function of strong, organic, economic growth that leads to a rising demand for capital over time. There have been two previous periods in history that have had the necessary ingredients to support rising interest rates. The first was during the turn of the previous century as the Rockefeller's, Carnegie's, Mellon's, Vanderbilt's, and others wrestled for control of the American economy. Empires in rail, tobacco, steel and trade were built on the backs of human misery as economic output flourished.
