Saturday, September 24, 2022

Welcome to the Third Great Bond Bear Market – it’s a doozy

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Global government bond losses are on track for their worst performance since 1949, BofA Securities says.

This “bond crash” (U.K 2-year Gilt yield is up 35 basis points today) is the beginning to the Third Great Bond Bear Market, which is “thus far a doozy,” BofA strategist Michael Hartnett wrote in his weekly “Flow Show” note Friday.

Government bond losses will eclipse the impact of the Marshall Plan (the Yankees beat the Dodgers in the ’49 World Series so stay tuned for further echoes). They will be greater than in 1931 when the bankruptcy of Creditanstalt prefaced the Great Depression and 1920 following the Treaty of Versaille, Harnett said.

The “bond crash bond crash threatens credit events & liquidation of (the) world’s most crowded trades,” which are long U.S. dollar (USDOLLAR), long U.S. tech (XLK) (XLC) (XLY) (SMH) and long private equity (PSP), which is down 47% from highs, he said.

“True capitulation is when investors sell what they love & own,” Hartnett added.

His advice is to nibble at the S&P 500 (SP500) (NYSEARCA:SPY) at 3,600, bite at 3,300 and gorge at 3,000.

1987 or 1975?

The bear risk would be that conditions are similar to 1987, Hartnett said.

There has already been a huge rise in yields (NYSEARCA:TBT) (TLT) (SHY), geopolitical volatility, abnormal foreign longs in the U.S market and a lack of global and domestic policy coordination, he said.

All “that’s missing is sudden reversal in everyone’s favorite US dollar long (Baker-Pohl dollar-deutschemark spat was spark with lit the fire).”

The bull risk would be that conditions are similar to 1975.

Once the “2nd derivative of inflation & rates reversed in 1975 after stagflationary oil shock … inflation stabilized at higher level (5-6%), Fed eased, markets recovered with new leadership,” Hartnett said.

After falling 31% in 1973, U.S small caps (IWM) rose:

  • 20% in 1974
  • 53% in 1975
  • 57% in 1976
  • 25% in 1977
  • 23% in 1978
  • 43% in 1979

Homebuilder hope?

The 33% drop in homebuilders form peak to trough is not far off those of “normal” recessions, Hartnett noted.

He said there may be “diamonds in the rough” in stocks and credit absent a “financial event”: SPDR Homebuilders (XHB) Russell 2000 (RTY) Philadelphia Semiconductor (SOX), emerging markets (VWO) (EEM), investment grade bonds (LQD) and high-yield bonds (HYG).

But homebuilders fell 91% during the Great Financial Crisis, he warned.

See Goldman Sachs’ new S&P target.


(Except for the headline, this story has not been edited by PostX News staff and is published from a syndicated feed.)

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