The most pronounced rally in Treasuries ever

gardener2000

 

We just came off the most pronounced rally in Treasuries ever – a move from

4.08% in the 10-year note in mid-October to 2.55% as of the first week of

December, which was a 37% plunge in the yield over 38 trading days which we

can assure you was unprecedented. So it would stand to reason that (i) we would

see rebalancing from the asset mix teams at pension funds and mutual funds into

equities and (ii) that we would see a correction in the bond market near-term. But

make no mistake – we are not at all bearish on the fixed-income market. Back in

the 1930s, AAA-rated bond yields bottomed in December 1940 – a full 8 years

after the initial recession ended (and based off the traditional spread off of

Treasuries, would have implied a sub-2% yield on the 10-year note). In Japan in

the 1990s, the 10-year JGB yield did not bottom until March/03 at 0.53% though

we should acknowledge that the prior pre-Asian crisis low of 2.5% was reached in

the summer of 1997 – again, this was three years after the recession ended. This

is what happens after a credit collapse – yields trend down for years and go to

unimaginable levels at the lows.