 BONDS

Jim Grant on the Bond Market’s

35-Year Bull Run
By James Grant

Feb. 1, 2019 2:50 p.m. ET

This column marks a homecoming for Jim Grant, founder and editor of
Grant’s Interest Rate Observer. A Barron’s staff writer from 1975 through
1983, Grant now will be back twice a month with Current Yield, a credit
markets column he originated in 1980. In this first installment, he
reflects on what has happened to bonds in the 35 years since he last
wrote for Barron’s.

Interest rates can astound you. Thirty-five years ago, it was their height that
beggared belief. Now it’s their plunge from those heights that makes you
shake your head. “Markets can do anything,” said the late, great founder of
the Dow Theory Letters, Richard Russell. The bond market, especially.

If you have to forecast interest rates, do it in the shower where nobody can
hear you. But suppose, in the spring of 1984, as long-dated Treasuries hit
14%, you, our imaginary pundit, were touched with the gift of clairvoyance.
You might have said this:

“A 14% Treasury yield is a gift from the gods. The consumer-price index is
running at just a little over 4%. In breaking the strike of the air-traffic
controllers, President Reagan has likewise broken organized labor. Paul
Volcker is running the Federal Reserve. Inflation is over. Bonds are priced to
deliver an equity return without the equity risk.

“ ‘Excess leads to an opposite excess,’ you continue, summarizing the second

rule of investing of the strategist and technician Bob Farrell. “Today’s towering
yields sow the seeds of tomorrow’s tiny ones. There’s nothing in the economic
data to justify 14%. It’s the result of 35 years of bearish conditioning.
Sedimentary deposits of bearishness have been collecting in the market’s
brainpan since 1946.

“Mark my words,” you close with a flourish. “By the time this bull market is
over, euro-denominated junk bonds will yield less than 1%.”

The Good Old Days Yields on 10-year Treasuries peaked at 14% in 1984 and
seemed to have bottomed ou tin 2016 at 1.32%.Source: Bloomberg

Your prophecy came to pass, all right, but a lot of good it did you. You lost
your job for talking gibberish. Not even the sell-side could stand to listen to
you.

Jumping ahead 3½ decades, we arrive at another generational inflection

point. In July 2016, the 10-year Treasury was quoted at 1.32%. Everything
was different than 1984, yet, in a strange way, everything remained the same.
People loved bonds when they yielded little, even more than they hated them
when they yielded much. And in that season of yielding little, some $10 trillion
of fixed-income securities worldwide were actually priced to deliver a nominal
yield of less than zero.
In 2016, again granted foreknowledge, you addressed your public, thus:
“Thirty-five years ago, the Fed was trying to kill inflation. Now it’s trying to
rehabilitate it. It’s defining ‘price stability’ as a 2% rate of inflation, a hefty
premium, incidentally, to that puny 1.32% yield. A bond is a promise to pay
money. But—in this age of monetary tinkering—what’s money? The bond bull
market is over.”

Having learned your lesson in 1984, you push prescience no further.

Nobody’s going to believe you, anyway.

You’re on safer ground with the history of interest rates, though even some of
that defies belief. One singular fact is that real, high-grade, sovereign yields
have been on a general, jagged decline since the time of Christopher
Columbus.

Here’s another: In America, nominal yields have tended to rise and fall in
multidecade intervals—down in the final quarter of the 19th century, up
through 1920, down till 1946, up till 1981, down till 2016, and now up again.

There was nothing precipitous about the tempo of rising rates in the early
years of the previous bear bond market. Long-term government yields were
2.25% in 1946. They were 3.25% in 1956. You hardly noticed they’d moved.

Then, again, past performance guarantees nothing. Big deficits and radical
monetary policy could force a faster rate of rise this time. America needed 192
years to amass its first $1 trillion in gross public debt; it hit the mark in 1981.
Now there’s $22 trillion on the books, with another $1 trillion looming in this
ostensibly prosperous fiscal year alone.

The dollar is another historical anomaly. It was first defined as a weight of

silver, next as a weight of gold. Then, in 1971, it was undefined. It became a
piece of paper or a line of computer code—unconnected to the precious
metals, its value is what the market says it is. Will you trust that piece of paper
in the next bout of inflation?

Having pushed aside the silver standard and the gold standard, the world
today is on a Ph.D. standard. The central bankers and their theories come
straight from the university economics departments (Jay Powell, to his credit,
is neither economist nor professor). In response to the events of 2008, the
doctors of economics pressed down interest rates and held them down.
Cheap capital built leveraged, loss-making businesses. Private equity
boomed. How will these bull-market creations fare in the face of higher rates,
tighter credit, and cyclically stunted revenue growth? We are going to find out.

This column, in sum, judges that the July 2016 low in rates marked the start of
a new, perhaps lengthy bond bear market, with lots of volatility along the way.

A detailed forecast will presently follow—we’re stepping into the shower now.