The End of the 30-year Bond Bull Market?

Is the great 30-year bull mar­ket in bonds com­ing to an end? Yes, per­haps — or maybe not: It depends on whom you ask and how flex­i­ble your tim­ing is.

While many peo­ple think of bonds as con­ser­v­a­tive hold­ings, they have pro­duced stel­lar returns for decades, thanks to the tam­ing of infla­tion and other fac­tors. A bas­ket of stocks would have returned a mere 19% from the start of 2000 through 2011, for exam­ple, while a bas­ket of bonds would have returned about 113% through a com­bi­na­tion of ris­ing prices and inter­est earnings.

But many experts say eco­nomic recov­ery could now reverse the process by dri­ving inter­est rates higher, caus­ing bond prices to fall. Yield on the 10-year U.S. Trea­sury rose to around 2.25% in March, after hov­er­ing around 2% for four months. "I think bonds are less attrac­tive than they have been for a long time," says Scott Richard, Whar­ton prac­tice pro­fes­sor of finance.

But ris­ing rates and falling prices are not nec­es­sar­ily com­ing so soon, accord­ing to Whar­ton finance pro­fes­sor Franklin Allen, who notes that short-term rates in Japan have stayed extra­or­di­nar­ily low for many years. Though the odds favor a rise in rates, strong demand for high-quality bonds, par­tic­u­larly U.S. Trea­suries, could per­sist for some time, he says, keep­ing prices high and yields low. "I think [Trea­suries] are still very much a safe haven, and that's why inter­est rates are so low, even though there are many things to worry about." He adds that there is a chance they will stay low "for a very long time."

How­ever, accord­ing to Whar­ton finance pro­fes­sor Krista Schwarz, "It's vir­tu­ally impos­si­ble to fore­cast future yields. One can talk about risks to the upside and risks to the down­side, but both risks always exist."

From Bull to Bear

Clearly, the U.S. econ­omy is gain­ing steam, though slowly. Typ­i­cally, that causes inter­est rates to rise, which dri­ves bond prices down — turn­ing a bull mar­ket into a bear. But the econ­omy has had false starts in the past. Signs were good early in 2011, but progress stalled amid the Euro­pean debt cri­sis and the tsunami and earth­quake in Japan. Most experts agree that eco­nomic signs are even stronger this year, but many warn that progress could be derailed by gov­ern­ment debt prob­lems in the U.S. and Europe, ris­ing oil prices and rip­ple effects from a slow­down in China and other emerg­ing mar­kets. In the U.S., the trou­bled hous­ing mar­ket con­tin­ues to dampen recovery. (more)