Declares the End of the Secular Bull Market in Long-Dated U.S. Treasury Bonds

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MarketThoughts (, a stock advisory and educational site operated by Henry To, CFA, and Rex Hui, trading systems programmer brings to you an exclusive analysis on why the secular bull market in the U.S. long bond that began in 1982 is over.

The confluence of events which created the “conundrum” in the U.S. and global long bond market – that of stubbornly low long-term interest rates over the last few years – is coming to an end, argues Henry To, author and co-founder of the investment advisory website, The demise of this benign environment for long-dated bonds – combined with an ever-rising budget deficit, current deficit, deteriorating demographics in the developed world, and the slowing down in U.S. corporate savings – will mean that long-term interest rates most likely have seen its bottom in mid 2003, with still-higher rates yet to come.

We first discussed that “rising rates were a given” in our March 12, 2006 commentary – when the yield of the 30-year Treasury bond stood at 4.74%. As of the close on Tuesday, April 18, 2006, the yield of the 30-year Treasury bond has risen 32 basis points to stand at 5.06%. In our March 12th and our April 16th follow-up commentary (, we cited many reasons for the end of this benign environment. Among them are:

  • The demise of the Bank of Japan’s “quantitative easing” policy, which involved the mass purchases of the 10-year Japanese government bond by the Bank of Japan in order to keep the yield curve low across all maturities. Such “manipulation” on the part of the Bank of Japan has indirectly caused a decline in long-term rates in both the U.S. and Europe, as Japanese private investors have been forced to go overseas in their “search for yield.” This “search for yield” game is now coming to an end.
  • U.S. corporations have been generally saving since the early 1980s – but the spike in cash accumulation by U.S. corporations over the last few years has mainly been a result of a lack of capital spending and a 40-year high in corporate profits (as a percentage of GDP). These trends are not sustainable and will be reversed in due time. Moreover, shareholders have also not been pleased with the sizable cash hoard that companies have been accumulating – instead, they have been asking companies to buy back stock or to make acquisitions. As a result, the corporate bond market should see heightened activity in the foreseeable future – with many corporations competing for loans directly with the U.S. government – thus driving up yields in the process.
  • Globalization should continue to depress wages in the blue-collar industries of the U.S. (a very popular argument among many well-respected economists such as Gary Shilling and Richard Russell), but there are signs that wages are now increasing rather rapidly in both China and India. Moreover, union membership is currently at only 12% of the U.S. workforce (with half them being governmental workers) – and since a significant amount of “wage squeezes” have occurred over the last 20 years because of the demise of union membership, one has to wonder: Just how much more wage concessions can we get from the unions?
  • In the latest bull market in oil prices, many OPEC countries have not been spending that sizable cash hoard as they have in the past. Except for a brief spike in 2000, the value of oil exports from OPEC countries has been consistently lower than imports from the early 1980s until 2003. For the year 2005, however, the OPEC countries as a whole ran a good sized surplus of over US$150 billion – with much of the evidence (hard as well as anecdotal) suggesting that approximately 60% of that money is still with dollar-denominated assets such as U.S. Treasuries, U.S. Agency debt, or investments in U.S. assets through hedge funds or private equity funds. Unless oil rises to $80 a barrel later this year and to $100 a barrel over the next few years, such “recycling of petrodollars” into U.S. debt will eventually diminish – given the sizable welfare states of countries such as Saudi Arabia and Kuwait. Moreover, one has to wonder: How much further will China, India, the airlines, GM, Ford, and U.S. blue-collar labor absorb all these increased commodity costs before they get passed into core inflation?

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The mission of is to provide the highest level of performance, service, integrity and education to our readers. This involves providing insights into the factors that will affect the stock market and individual stocks - helping our readers to maximize returns in favorable investment climates and protecting assets in unfavorable climates. We provide our readers with a twice-a-week commentary designed to educate subscribers about the stock market and the economy beyond the headlines. This commentary usually involves focusing at the fundamentals and technicals of the current stock market, but may also include individual sector and stock analyses - as well as more general investing topics such as the Dow Theory, investing psychology, and financial history.

In January 2000, the cofounder, Henry To, CFA of alerted his friends and associates about the huge risks created by the historic speculative environment in both the domestic and the international stock markets. Through a series of correspondence and e-mails during January to early April 2000, he discussed his reasons and the implications of this historic mania, and suggested that the best solution was to sell all the technology stocks in one's portfolio. He also alerted his friends and associates about the possible ending of the bear market in gold later in 2000, and suggested that it was the best time to accumulate gold mining stocks with both the Philadelphia Gold and Silver Mining Index and the American Exchange Gold Bugs Index at a value of 40 (today, the value of those indices are at approximately 150 and 370, respectively).


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Rex Hui