Is bond market price action looking a bit like 1993-94? And the timing of fairytale 100 year bond issues.

1993 was a golden year for US Treasury investors, with 10 year yields falling from 6.7% at the start of the year to 5.3% by its end.  It felt like nothing could go wrong – and inflation had even fallen throughout the year from 3.3% to 2.7%.  Yet on 4th February 1994, the Fed hiked rates by 0.25%.  And they hiked again in March, by 0.5% in May and August, and a further 0.25% in November.  The annual inflation rate was still actually falling until May 1994, when it hit 2.3%, and on a monthly basis in January, just before the shock hike, inflation was 0%!  Yet the Fed was right – there were some price pressures in the economy and these became visible in the third quarter of 1994.  Their trigger was a significant improvement in economic growth.  At the start of 1993 the economy was growing at under 1% on an annualised rate, but this had dramatically improved to over 5% by year end.  By early 1995 though it was back below 1% after the series of aggressive rate hikes – a result that perhaps led the Fed to be much more gradualist in future expansions?

The reason we are interested in 1993-94 is that the price action in Treasuries back then looks very similar in scale and direction to what we saw in gilts and other markets in 2011.  The 10 year gilt yield fell from nearly 3.5% to below 2% in a year.  Since the start of this year yields have started to rise again, with big moves in the last 3 days.  It’s a similar pattern to 1994 but with one big difference – there’s no way that Central Banks are going to hike rates this year is there?  And that alone makes a sell off on 1994’s scale unlikely.

A couple of last points though – firstly the US Fed has said that economic conditions “are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014”.  But note that this is not an explicit promise, but is totally contingent on the economic activity.  And also note that the market no longer believes that “late 2014” is when rates will rise – the market is now pricing in a Fed rate hike in 2013, and for rates to be around 75 bps higher by the late 2014 Fed expected first hike.

And secondly, I have also marked on the chart the date when Walt Disney famously issued a 100 year $ bond, just months before the massive bear market began.  I’ve also marked George Osborne’s announcement of the potential 100 year gilt in the UK this week.  The Circle of Life?  When You Wish Upon a Star?

Does 2011-12 look a bit like 1993-94?

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Discuss Article

  1. brian dennehy says:

    Hi Jim, I’m not sure 93/4 is particularly relevant for lots of reasons, but here’s one. The action in Treasuries in recent weeks reflects what happened in 2011, which in turn reflects what happened in 2010.
    The detail is that in 2011 there were 4 major selloffs in Treasuries, they usually lasted a few weeks and the average increase in the yield was 0.46% (we have recently moved up 0.36%, so nearly there). Corrections are what happens in markets – in 2011 it didn’t stop yields over the year going from 3.3% to 1.89% (on 10 year Treasuries).
    In 2010 there were also 4 spikes in the yield, and the average move was exactly the same as in 2011.
    Every time we get these spikes the headlines tell us the bull run in US/UK govt bonds is over. Of course one day these headlines will be right – but are they likely right now? Is deleveraging over? Is debt reduction and austerity complete? Although US consumers have delevered a lot, the US govt hasn’t really begun debt reduction yet, and this is deflationary and positive for Treasuries. (Credit to Dave Rosenberg for lots of these numbers)

    Posted on: 16/03/12 | 9:28 am
  2. Macro Analyst says:

    Actually if we look at the longer term bullish and bearish phases for Treasury bonds, the period 1954 to 1981 was a bear market for bonds…Then from 1981 till now, we are in a bull markets with bond yields trending down during this period. Now, interest rates might trend up…Might be gradually. But real interest rates will remain negative

    Posted on: 19/03/12 | 6:38 am
  3. Eberhard Krüger says:

    Thank you for the interesting comparison. I understand and agree that this time the central bank will not be in hurry to hike rates. But will that mean, that a sharp rise in yields is not possible? A hawkish central bank is not necessary condition  for higher yields. 2009 the yield rose almost 160 bps without an action from the central bank. If the macro data does improve gradually it should be possible to see a similar reaction.

    Posted on: 19/03/12 | 9:07 am
  4. Macro Analyst says:

    One major point is that the Federal Reserve system has been one of the biggest buyers of US debt in the recent times. Therefore, even in times of relatively high inflation, yields might be lower due to artificial demand coming from the Fed buying bonds. However, at one point of time, interest rates will trend higher. Inflation might just be much higher then.

    Posted on: 19/03/12 | 12:24 pm
  5. Bailout Bondsman says:

    Eberhard Kruger is on the right track – reluctance by central banks to raise short term rates does not rule out a sharp rise in bond yields, given that current yield levels are so low.

    In the US, the gap between the one month Tbill rate and the ten year yield is 220 basis points.  This is a little above the historical average (150 bps), but not remotely extreme.  The gap has exceeded 330 bps for 10% of the time over the last five decades, and reached 650 bps in 1982.  Absent more QE, there is plenty of room for a bear market in Treasuries.

    Posted on: 19/03/12 | 2:11 pm

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