By David Randall

NEW YORK, (Reuters) – The U.S. bond bull market of 40 years is over. The bond bullish market is here to stay.

U.S. Treasuries began 2022 on the heels of one its largest slide in history. Many bond investors fear that the end may be near for decades of U.S.-issued debt. This has seen yields drop from an all-time high at 15.3% in 1981 to just 0.54% in March 2020.

U.S. Treasury bears, however, have had a mixed record at Wall Street. Because of the Fed’s comparatively moderate economic growth rate and bond market bounce back from selloffs in the past, it has been a consistent success.

The Federal Reserve has signaled that it will use large rate rises and quick unwind of its balance to reduce inflation from the 40-year peak.

Michael Hartnett from Bank of America Global Research, Chief Investment Strategist, stated, “Bonds have been a bull market in the last 40 year, but they’ll be one of bear markets of 2020s.”

GRAPHIC – Bond bull market completed? https://fingfx.thomsonreuters.com/gfx/mkt/zjpqkmnompx/Pasted%20image%201651078621646.png

The yields of the benchmark 10-year US Treasury, which moves inversely with prices, are at 2.87%. This is an increase of 136 basis points. The ICE (NYSE 🙂 BoFA US Treasury Index fell to its lowest point since May 2019.

Recent Bank of America Merrill Lynch (NYSE) survey revealed that bonds were among the top global funds managers’ short positions. The longest losing streak in 2013 since 2013, the ICI data revealed, has seen investors withdraw money on the net from bond funds for the past 10 weeks. The iShares 20+ year Treasury Bond ETF (NASDAQ:), the largest bond-focused exchange traded fund is down 18%.

Hartnett thinks 10-year yields may reach 5% within the next few years. Hartnett also believes there could be strategic buying opportunities, despite the secular bearish outlook. This would bring yields to their highest point since 2007.

Deutsche Bank (ETR:) analysts echoed the forecast of a 5% Treasury yield peak in a note earlier this week, which also said aggressive Fed tightening could send the economy into a “significant recession” next year.

Another red flag: comments from Fed Chair Jerome Powell earlier this month on “front-end loading” the Fed’s hiking cycle. Some investors have now penciled in 75 basis point increases at the Fed’s June and July meetings, following an expected 50 basis point hike at next week’s Fed meeting.[L2N2WK1MC]

A sustained period of bond weakness could have far reaching effects, from weighing on companies’ borrowing costs to hurting investors’ portfolios.

According to data from Securities Industry and Financial Markets Association, the total Treasury assets of individual investors and mutual funds was $4.39 trillion by 2021. Morningstar reports that bonds make up around 20% of all 401(k), according to Morningstar.

“People are going to face for the first time in decades what it means to have significant declines in their bond portfolios,” said Jim Paulsen, chief investment officer at the Leuthold Group. “It’s unique, it’s outsized, and it hurts.”

For stocks, the impact of higher Treasury yields has depended on whether they are accompanied by rising consumer prices, a study by LPL Financial (NASDAQ:) showed – potentially spelling troubling for equities in today’s super-charged inflationary environment.

Stocks notched an average gain of 6.4% in 13 periods of rising bond yields between 1962 and 2016, compared to the index’s long-term average of 7.1% during that period, the 2021 study showed.

However, when yields were high and inflation was high the average annual return dropped to -0.4%.

It is not common to believe that bonds will suffer years of loss. Investors believe that the Fed can successfully control inflation and allow them to reduce monetary tightening. [L2N2WJ0W3]

Andy McCormick (NYSE:), head of Global Fixed Income at T. Rowe Price, said his funds have been buying 10-year Treasuries, gauging that much of the Fed’s tightening is already priced in.

The selloff may also be attracting foreign buyers into Treasuries, potentially helping stabilize prices – at least in the short term.

A NatWest’s report said the 3% mark – which yields have failed to breach – may be a “psychological level” that draws foreign buyers.

Lou Brien of DRW Trading Group stated that the demand from foreign buyers for the Treasury auction this week, which took place earlier in the week, was second-highest ever, in percentage terms.

GRAPHIC: Foreign holdings of Treasury securities https://graphics.reuters.com/USA-BONDS/lbvgnyjjwpq/chart.png

Ash Alankar, Head of Global Asset Allocation at Janus Henderson, plans to buy bonds when real yields – a measure of Treasury yields adjusted for inflation — turn positive for a sustained period.

“Bonds won’t have the same historic return in the decade ahead, but they will still be attractive,” he said.