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--- In gannsghost@xxxxxxxxxxxxxxx, "topos8" <topos8@xxxx> wrote:
THE U.S BOND MARKET IN 2004
On December 29, 1982, with long term U.S treasury bonds yielding
close to 11 % and the bond futures trading near 60 (basis new
contract) I published a long term bond market forecast. This was
sent to subscribers of my newsletter, The Cyclic Forecast, which
ceased publication in 1983.
Not once over the past 20 years have I been tempted to alter the
conclusions reached in that forecast, but now might be a good time to
bring it up to date.
The thesis of that forecast was that a new long term cycle in bond
prices and interest rates had begun at the September 1981 peak in
long term interest rates when the 30 year treasury bond was yielding
15.30%. I expected the new cycle to evolve in a way similar to the
cycles that had begun at the two previous long term peaks in interest
rates in 1857 and in 1920.
I quote from the December, 29, 1982 forecast: "If the bond market
follows the average of these two historical cycles, then bond prices
should be in a generally rising trend for the next 30 years. The
peak in bond prices and the low in long term interest rates is not
due until the year 2010…..long term bonds are once again (a) high
return, long term investment vehicle and will remain so for a
generation to come."
Over the past 20 years I have often reiterated the conclusions of
this forecast in conversations with my consulting clients. In fact, I
have often asserted that before this bond bull market ends the yield
on long term treasury bonds will be BELOW the dividend yield on the
Dow industrials. As I write this the U.S. treasury long bond yields
about 5.10% while the Dow's dividend yield is about 2.00%.
Needless to say I think that there is yet another big upleg in long
term bond prices ahead of us (and probably another big downleg in
stock prices). My current estimate is that the long bond will
probably yield around 3.50% sometime in 2008 while the Dow
industrials will then show a dividend yield of around 4.00%. At that
juncture a new 20 year bear market in bonds prices will begin.
One way to get a glimpse of likely bond market trends for 2004 is to
make use of the historical averages of price and interest rate trends
during the bull market in bonds that began from the 1981 lows.
First of all it is probable that the June 2003 top in bond prices
(123 in the futures and a yield of 4.14% in the long bond) was a top
of importance comparable to the tops in 1993 and 1998, the last two
temporary tops in this ongoing bull market. Here's why.
At the October 1993 top bonds had advanced 37 months from the
September 1990 low. The futures had rallied 35 points while the long
bond had dropped from a yield of 9.12% to a yield of 5.77%, a
reduction of 37%. At the October 1998 top bonds had advanced 47
months from the 1994 low. Futures had rallied 39 points while the
long bond had dropped from a yield of 8.18% to a yield of 4.65%, a
reduction of 44%.
In comparison, at the June 2003 top the bonds had advanced 41 months
from the January 2000 low. The bond futures had rallied 34 points
while the long bond yield had dropped from 6.77% to 4.14%, a
reduction of 39%. All of these figures show that the January 2000 –
June 2003 upswing was comparable in these important respects to the
upswings that ended in October 1993 and in October 1998.
The 1993 and 1998 tops were followed by declines which lasted 13 and
15 months respectively. The bond futures dropped 26 points from the
1993 top at 122 while the decline from the 1998 top was about 27
points from 135 (adjusted for the change in contract specification
that occurred in the March 2000 contract). From 5.77% in October 1993
the long bond yield rose to 8.18% in November of 1994, and increase
of 42%. From 4.65% in October 1998 the long bond yield rose to 6.77%
in January of 2000, an increase of 46%.
If the precedents established by market action following the 1993 and
1998 tops is followed subsequent to the 2003 top I would expect a low
in bond prices and a high in the long bond yield sometime 13 to 15
months after the June 2003 top, i.e. sometime between July and
September 2004. If the bond futures again drop 26-27 points from
their 2003 top at 123 the 2004 low will be in the 96-97 range. If the
yield on the long bond increases 42% – 46% from its 4.14% level in
June 2003 it will reach the 5.88% - 6.04% zone at its 2004 peak.
The extent of the upwing in bond prices which is likely to begin from
the 2004 low is harder to estimate, but I shall probably not go far
wrong if by assuming that it will be similar to the average of the
upswings that ended at the 1993, 1998 and 2003 tops. If it does the
upswing will continue about 42 months, i.e until April of 2008. It
should carry the bond futures up about 37 points, i.e to about the
134 level. The long bond yield will probably drop about 40%, i.e to
3.50% or so.
Carl
--- End forwarded message ---
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