Bond yields are rising again..Whats the reason?....Because of their historically low yields, most people haven’t made much out of the recent rise in interest rates.
This rise has come from a low level, but it is interesting to note that if you look at the yield of the 10-year bond, it has actually been in an uptrend since bottoming at near 2 percent in December 2008. After a rise to 4 percent in mid 2009, yields dropped to 2.3 percent by 2010. However, they didn’t go below their 2009 lows. In this most recent rally, bond yields fell to 2.80 percent but again didn’t take out the 2010 lows.
Slowly it looks like the bond is making a massive long-term top and interest rates are making a massive long-term bottom. It should be noted that these bond cycles are often long in duration. The 1981 to 2008 bull market in bonds was marked by a 3-year bottoming process from 1981 to 1984 before bonds really began to climb in price and fall in yield.
It looks like we are on the other end of the spectrum with the bond now in the midst of a long-term topping pattern. Due to the precarious nature of the U.S. fiscal situation, which features a deficit of nearly 10 percent of GDP and nearly $50 trillion in unfunded liabilities, I think that rates may start to rise faster than anyone thinks. We have seen this is in the PIIG nations that possess similar debt loads.
Whatever the case, it is clear that interest rates will be headed higher in the coming years starting from Q-4, 2012 OR Q-1 2013. Tough times ahead for the US economy...