The Cycle Turns

Buttonwood

The cycle turns

The developed world may have seen the low in bond yields

Mar 24th 2012 | from the print edition

EQUITIES may be enjoying a bull run

but the government-bond market has

turned sour. Having bottomed at 1.67%

in September, the yield on the ten-year

Treasury bond has risen to 2.38%, with

the sell-off accelerating in the past two

weeks.

A rise in yields from what were very low

levels, in historical terms, is not that

surprising. The economic data have

been better than expected since the

start of the year, particularly in America, calming fears of a global

recession. A torrent of central-bank loans to euro-zone banks and

Greece’s debt-restructuring deal have made investors less nervous

about a break-up of the euro, removing the appeal of Treasury bonds as

a haven.

The big question is whether this is a turning-point in the bond market.

The chart shows how the rise and fall of Treasury-bond yields over the

past century-and-a-bit divides into very long phases. Chris Watling of

Longview Economics points out there has been a remarkable regularity

to the past three cycles—a 29-year downtrend, followed by a 32-year

uptrend and another 31-year downtrend lasting to the present. This

pattern is probably a coincidence but it does illustrate that bond-market

cycles are rather longer than those in the equity market. Mr Watling

points out that the early stages of bond cycles (1920-29, 1949-68 and

1982-2000) have been associated with equity bull markets while the

latter stages (1929-49, 1968-82 and 2000 to date) have been

associated with bear phases.

The big bear markets in bonds were associated with higher inflation.

There was a brief inflationary period associated with the first world war

and a much longer burst of rising prices after the second world war

which culminated in the 1970s. Some fear the inevitable response to

the current crisis is that countries will attempt to inflate away their

debt.

But there is not much sign of this in the consumer-price...