The Bull Case For Bonds

Central to my market and macro outlook at present is the likelihood we are amid a growth cycle downturn that is looking to decelerate meaningfully in the coming months. Whilst a potential recession was not part of this thesis, given the recent movements in the yield curve, geopolitical landscape, inflation pressures and deteriorating forward outlook for growth, the probabilities of such an outcome seem to be increasing by the day.

So, whilst having a macro framework and data driven outlook in mind, how to trade and profit from this scenario is key. It is all well and good analysing markets, companies and the macro environment, but, profiting from this analysis is what we as investors strive to do. In a slowing growth environment, buying long-term treasuries has been the go-to macro trade over the past 40 years. Right now, this classic late cycle long-bond trade is more hated and contrarian than it has been in a generation.

This is perhaps rightfully so with inflation is at its highest level since the 1980s. Unsurprisingly, long-term treasuries have as a result suffered their worst peak-to-trough drawdown in over 20 years.

Source: Bloomberg

This bond sell-off has seen 30-year yields once again test the upper range of their 40-year downtrend, a trend that has been colloquially termed ‘The Chart of Truth’.

Is the great bond bull market finally over and the Chart of Truth no more?

We are indeed seeing endless calls for this to be the case, with any suggestions to the contrary being met with ridicule and contempt. However, some of the great contrarian trades eventuate when there is clear consensus. Right now, the consensus is very much of the opinion that yields are only going higher.