This week, despite a strong auction, the benchmark ten-year U.S. Treasury note’s yield hit a nine-month high of 2.6% Wednesday. The alarm bells started ringing.
The day before, former bond king Bill Gross, whose track record has been mixed at best, especially during the latter years of his tenure with Pimco, declared a bear market in bonds had been “confirmed” because rate increases had broken the multiyear down trend in yields. (He later said, “bonds, like men, are in a bear market,” but I won’t go there.)
On Wednesday afternoon I spoke with technician Craig Johnson, who has a consistently good long-term bullish track record. He told me yields were heading higher and the 36-year-long bull market in bonds was probably over.
Meanwhile, on Thursday, the Dow Jones Industrial Average, the S&P 500 index, and the Nasdaq Composite index all hit new all-time highs, and show no signs of stopping.
As I wrote in MarketWatch, Johnson urged clients to take some profits in advance of a potential 20% correction in stocks brought on by increases in bond yields.
Should you sell?
First of all, GoldenEgg Investing®’s suggested retirement investing plans already moved to a low-risk posture last year because of rising geopolitical risk and high stock valuations. We were probably a bit early, but I think we struck a good balance between staying in the market and reducing risk. If you’ve been following a plan of your choosing, you’re probably protected enough for the long run against any sell-off in stocks.
Second, I’m not sure I completely agree with Gross and Johnson (and another bond bear, Jeffrey Gundlach) that 2.6% is the breaking point.
In 2012, ten-year yields fell as low as 1.64% only to surge above 3% later on. Ultimately, yields dropped to their multi-decade low of 1.37% in July 2016, so even a spike above 3% didn’t signal the end of the bond bull.
For bonds to truly be in a bear market, I believe ten-year yields will have to rise to 3.25% to 3.5%, which may well happen if the global economy continues to strengthen. Of course, at that point, investors will have probably reacted—or overreacted—by selling bonds and stocks.
There’s too much complacency in this market already; a sudden, unexpected spike in rates is not on investors’ radar screens. Nor is a sudden surge in inflation or any actions the Federal Reserve might take to counteract either of these.
I’ll be looking closely at GoldenEgg’s bond investments and will immediately report to subscribers any changes in our suggested holdings. Until then, staying the course is the way to go.