JACKSON HOLE, Wyo. -- The following blurb appeared in this column roughly four months ago:
Bye-bye bull market for bonds? James Grauer of Omnitrage Economics suspects so. His weekly oscillator has signaled an end to a medium-term up-cycle that began roughly four months ago, and his monthly has marked the termination of a long-term bull market that began in June 1997. The convergence of these two indicators at tops, Grauer says, confirms the final phase of lower yields and the beginning of a secular bear market.
Bottom line? Purge thoughts of a 4% bond. Grauer is well aware that most fundamentalists will find this counterintuitive and that most technicians will consider it absurd. So why listen to him? Because back on June 6, 1997, his indicators predicted "the formal commencement of the secular bull market in bonds," and the yield on the 30-year dropped to 4.98% from 6.91% over the next 15 months.
The yield on the 30-year stands at 5.37% now vs. 5.13% then -- congratulations to Grauer on another excellent call. This latest forecast is even more impressive given that, at the time he made it, most other market participants were screaming that disinflation and the potential for more financial crises would continue to push yields lower indefinitely.
One more time: It is not necessary for inflation to accelerate in order for interest rates to rise. The people who think it is were not around between November 1996 and April 1997, they were not around between January 1996 and June 1996, and they most certainly were not around between October 1993 and November 1994.
Yet here they are now, to call the recent backup in yields nothing more than a temporary blip.
The lousy forecaster blames his miss on supply and/or the Japanese -- and swears yet again that he'll no longer be caught off guard. The hedgie says he's thinking about nibbling now that prices have dropped -- because they're bound to head higher again. The New Era wing nut says that the 30-year yield will hit 4.5% by end-June and 4.0% by end-December -- no matter what.
How about the guy who's been right since June 1997? What's he say?
He says we are still in a bear market for bonds.
Does that prevent yields from falling here and there?
No more than a bullish market for shares prevents their prices from doing so.
One of our old friends -- the Spread Table -- appears below.
The difference in yield between
Baa-rated corporate bonds and 30-year Treasury bonds still sits higher than it did last September -- the month after the Russian crisis hit. Yields on both instruments show increases since then, but the corps have tacked on more than twice as many basis points as the govies. The Aaa-bond spread, meanwhile, now sits lower than it did in September -- but the narrowing comes exclusively as a result of higher Treasury yields.
And claims to the contrary notwithstanding, neither spread can yet boast A Return to Normal.
Great weekend (even in the face of a ridiculous
loss). Learned that
pitchers and catchers report Thursday; saw the
give up "only" 16 goals in two games against those
sissies; and took in a local theater-company production of
that a "real" city like San Francisco can only hope to stage.