Dalio Says Bonds Face Biggest Bear Market in Almost 40 Years

By Anthony B. Sanders

Dalio Says Bonds Face Biggest Bear Market in Almost 40 Years (Treasury and Mortgage Rates Rising)

Jerome Powell has been approved by The US Senate as new and improved Federal Reserve Chair. Well, at least the new Chair since I think he will just continue the same policies as former Chairs Ben Bernanke and Janet Yellen.

(Bloomberg) Billionaire hedge-fund manager Ray Dalio said that the bond market has slipped into a bear phase and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,” Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Dalio predicted that the Federal Reserve will tighten monetary policy faster than they have signaled, and said that economic growth is in the late stage of the cycle but could continue to improve for another two years. The current economic environment is good for stocks but bad for bond investors, said Dalio, who’s chairman of Bridgewater, the world’s biggest hedge fund.

“It feels stupid to own cash in this kind of environment. It’s going to be great for earnings and great for stimulation of growth,” he said.

That spurt will last for about 18 months and the central bank will then feel like it has to tighten monetary policy faster than the discounted yield curve, he said. That will be a negative for asset prices, he said.

Demand for bonds will fall as central bankers reduce monetary stimulus, but larger deficits mean that governments will need to sell more of the securities to raise money, Dalio said. That supply-demand imbalance will concern the central bankers, he said.

Bridgewater manages about $160 billion, according to its website.

While interest rates have been generally falling since the early 1980s, The Federal Reserve spawned a massive bull market in bonds with their zero interest rate policies (ZIRP) and Quantitative Easing (QE). It all started on August 29, 2007, the last day before The Fed dropped their target rate from 5.25% to 0.25% by the end of December 2008. This is a 500 basis point drop in slightly more than 1 year.

somges08207

Since August 29, 2007, the US Treasury Active curve has declined over 200 basis points (mostly on the short-end).

yc082907

So it Dalio correct? If we look at The Fed’s Dots Project, it is clear that Fed Board members think that that the implied Fed Funds Target Rate will rise to over 3% by 2020 and to over 2% by 2018 (this year).

dotproj

30 year mortgage rate have been rising since September 2017 and should continue rising for the rest of 2018. But that depends on 1) if The Fed continues to raise its target rate and 2) if The Fed ever starts to REALLY unwind its >$4.4 trillion balance sheet.

mortfed.png

So, like Dalio, I expected a sector rotation out of Treasuries and Agency Mortgage-backed Securities (Agency MBS) as The Fed dumps its holdings.

Now that Jerome Powell is taking over as Federal Reserve Chair, he will have to oversee the great sector rotation of financial markets out of Treasuries and Agency MBS.

powell-taking-over-as-fed-chairman-at-time-of-economic-calm-2018-01-23-1-primaryphoto

Is it my imagination or does Jerome Powell look like actor Buddy Ebsen of Barnaby Jones, Beverly Hillbillies and Wizard of Oz (almost) fame?

BarnabyJones_Title_BuddyEbsen

Subscribe to NFTRH Premium for an in-depth weekly market report, interim updates and NFTRH+ chart and trade ideas; or the free eLetter for an introduction to our work. You can also keep up to date with plenty of actionable public content at NFTRH.com. Or follow via Twitter @BiiwiiNFTRH, StockTwits or RSS. Also check out the quality market writers at Biiwii.com.