Further to my recent article ‘Bond bear due for hibernation in 2018?’, my partner Cory Venable has prepared this insightful chart of 10-year US Treasury yield cycles since 1993.
While the overall trend has been lower (solid purple line) throughout, the latter part of each economic expansion(red arrows) has culminated in stock market euphoria and a consensus expectation for rising inflation and interest rate hikes. This has prompted Treasury bonds to be sold and their yields to jump 65%, 72%, and most recently 106%, before higher interest costs–across the credit spectrum–affect abrupt monetary tightening on a heavily indebted world. Lower disposable cash flows force spending to falter, job losses, defaults, a liquidity crunch, and the economy to weaken.
At that point the cumulative weight of debt–which has risen higher and higher each cycle–magnifies the financial stress, intensifies the slowdown, and prompts a rush back to the most liquid ‘safe haven’ assets like treasuries, pushing their prices up and yields lower again, while risky assets are liquidated. Rinse and repeat.
Yields may rise a bit further this time (back to resistance purple line above?), but the pieces are already in place for the next cash crunch phase any day here.