This Bond Market Could Get Uglier

Buying the dips has led to quick profits, because central banks stuck with ultralow rates. This time may be different

- Brian Chappatta, John Gittelsohn, & Liz Capo McCormick

A little more than a week into the New Year, billionaire bond guru Bill Gross proclaimed the start of a bond bear market, after an extraordinary bullish run spanning more than three decades. Two weeks later, Ray Dalio, whose Bridgewater Associates is the world’s biggest hedge fund firm, piled on with a forecast of the worst bear market since the early 1980s.

As yields on U.S. Treasuries soared to levels unseen since 2014, Gross asked the question on many investors’ minds: Who would buy America’s debt right now? After all, the government deficit is soaring because of massive tax cuts, and the Federal Reserve, the largest single holder of U.S. government debt, is trimming its almost $4.4 trillion portfolio of securities.

Yet many investors in the world’s biggest bond market are smiling. Traders were bored out of their minds for much of 2017, when Treasury yields fluctuated within the tightest range in a half-century. During the years in which the Fed held interest rates near zero, pension funds and insurance companies were forced to buy riskier assets to meet their return targets. So they too are giddy at the prospect of a selloff in bonds that would push rates back up to the levels of yesteryear. “We needed this,” says Michael Franzese, head of fixed income trading at MCAP LLC, a broker-dealer. “This market is not going to go up forever.”

Since the 2008 financial crisis, buying when bond prices dipped usually led to quick profits, because central banks around the world stuck with ultralow rate regimes. Now there’s growing angst that this dip might be different. Those forces investors have counted on to continue keeping yields lower might not be so reliable anymore.