Bear market in bonds is dawning: strategists

By John Parry

NEW YORK (Reuters) - Treasury yields' recent push to five-year highs is the latest signal that a bear market in bonds may be dawning after a bull market that spanned nearly a quarter century.

The benchmark 10-year Treasury note's yield's climb of some 60 basis points in a month and move into a trading range between 5.25 percent and 5.50 percent already signals the market is in a downtrend. Still, most argue it has not yet entered a definitively bearish phase.

Nevertheless, a sustained break above the 5.5 percent level on benchmark U.S. Treasury note yields would almost certainly signal the dawn of a long-term bear market for bonds, according to Louise Yamada, founder of Louise Yamada Technical Research Advisors LLC.

Yamada, at this week's Reuters Investment Outlook Summit, said we are probably already in the early stages of a bear market and "but moving gradually into it."

A sustained move of the 10-year Treasury note yield above 5.5 percent would crimp consumers' and companies ability to borrow, further weakening the housing sector and damaging the economy as a whole, strategists said.

The Federal Reserve's campaign to cut interest rates to a four-decade low of 1 percent in 2003 pushed the 10-year yield to a cycle low of about 3.08 percent. In the 1980s, by comparison, long-dated Treasury yields peaked around 15 percent. Bond yields and prices move inversely to each other.

"Over the past 25 years, every backup in yields failed to exceed the previous backup," which was one of the technical hallmarks of the long-term bull market for bonds dating back to the peak in yields in the early 1980s, Yamada said.

Now, however, a composite view of yields on 10-, 20- and 30-year bonds is threatening to push through the 5.33 percent level, she said. "If this Treasury composite goes through 5.33 percent, you will have seen the first backup in rates that does exceed (the previous backup) in the past 26 years."

That would confirm the start of a long-term downtrend for bond prices.

Yet for now, bond market strategists are still debating the reasons for the latest spike in bond yields. Some question whether rising yields have been driven more by long-term factors such as global growth and inflation prospects, or by waves of selling from mortgage players, which strategists reckon have started to abate.

"If 10-year yields are moving north of 5.30 percent and making a new high yield for the cycle, you might argue you were in a bear market," said Richard Gilhooly, senior U.S. bond strategist of BNP Paribas Securities Corp., speaking at the Reuters Investment Outlook Summit on Tuesday.

But thus far, the benchmark yield's surge above 5.30 percent to five-year highs of 5.33 percent on Tuesday, has been fleeting. On Thursday in New York, the 10-year yield traded at 5.22 percent.

"For the time being, what we are seeing is a technical phenomenon," Gilhooly said of the government bond market sell-off earlier this week. "The whole mortgage universe tried to hedge at the same time."

But because worries about global economic growth, inflation and the threat of central bank rate hikes are one catalyst for the climb of bond yields, some analysts worry that the move higher may prove sustained and inflict damage to the world's biggest economy.

"It is kind of hard not to see the 10-year yield going to 5.50 percent, if not by summer's end then by the year's end," said Barry Ritholtz, chief market strategist at Ritholtz Research and Analytics, speaking at the Reuters Investment Outlook Summit on Wednesday.  Continued...