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The bond bear market makes it hard to buy equities

When a big trend breaks, the investment models that have worked for years, or even decades break down. This causes huge problems in the fund management industry, as all the money will be invested in “winning strategies”, that have suddenly become useless. As a case in point, in every other bear market I have traded, I would be hedging a bearish equity position with a long bond trade - which has totally failed this year. Being long TLT worked during even the mild sell off we saw in 2014/5, GFC and Covid. This time, bonds have been a disaster.

Why is this important? Well in the US in particular has relied on falling mortgage rates to drive consumer spending. That is the bond market has acted as a safety valve when ever recession has struck the US since 1980. Falling 30 year treasury yields have fallen, and then this allows a wave or refinancing to help power US consumption. Without yields falling, US consumption will not get an automatic boost. Or to put it bluntly, this is the first time since the 1970s that the offered mortgage rate has been so high above the outstanding debt rate. Even in the brief periods when mortgage rates have risen above the offered rate, such as 1994, 2000, 2007 and 2018 - you have not wanted to be anywhere near US equities. And as pointed out above, a bear market in US equities is not causing bond yields to fall.

As I pointed out in my note on “quality” investors, the S&P 500 has diverged along way from the total returns to bonds - after a good 40 years of moving together staying in a range between 1.2 and 0.7 - with only the extremes of the dot com bubble and the GFC offering exceptions. Todays pricing suggest extreme downside risk.

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Capital Flows and Asset Markets
Russell Clark