A major trigger of last week’s market sell-off was the steady but unrelenting climb in U.S. Treasury yields, which indicated higher borrowing costs, impending interest rate rises and generally bad news for most equity traders.
But the bond bear market is not yet upon us, says Credit Suisse’s Global Head of Technical Analysis David Sneddon, who believes the tipping point could be when the 10-year U.S. Treasury yield surpasses 3.05 percent.
Despite earlier calls by bond titans Bill Gross and Jeffrey Gundlach — in January, Gross said a bond bear market was confirmed after long-term trendlines were broken, while Gundlach issued warnings about the 10-year Treasury yield hitting 2.63 percent — many experts argue the incipient sell-off has yet to go into full-on bear mode. At time of reporting, the 10-year yield stood at 2.83 percent.
But as the yields continue to climb, with central banks moving away from bond buying — reversing a nearly three-decade trend of falling yields — the tipping point appears to be continuously moved higher.
Until recently, bond yields had been falling for decades. The average yield on a 10-year Treasury bond in 1981, for example, was higher than 15 percent. This change in course has spurred debate over whether we’re in bear market territory or not.
“Just starting with the 10-year Treasury in the U.S., we’ve seen a significant break this year,” Sneddon said. “If we look at a long-term chart going back to the 1980s, we’ve essentially broken that secular downtrend. That is huge. That big secular downtrend in yields is over.
“In our view, that indicates a more bearish tone — the market reaction to that has been compelling, we’ve seen yields rise sharply on that move. The big question now is: just because you break a secular downtrend, does that automatically mean you begin a secular bear market?”
Not necessarily, according to recent history — yields hit these levels in 2014 and did not trigger a massive sell-off. Sneddon provided that equities could still hold in the event that the downtrend in yields simply turns into a “sideways trend” — in that case, he said, “I think that’s fine for equity markets and we hold in.” Higher yields are typically bad for equities as they raise companies’ borrowing costs.
