Our longstanding call for a 1.5% yield on the 10-year is now just a handful of basis points of being attained. For those who really know me. I am ai perma-bull when it comes to bonds. and a good thing too since the yield on the long bond has generated a 35% total return over the past year and the 30~year zero coupon bond has seen a total net return of 72%.
The equity market as an asset class has delivered absolutely nothing. In fact. only twice in the past eight decades has the equity market managed to do what the long zero did in the past year - coming off the depressed lows of 1982 and 2009. The bond market managed to do it this time not off some depressed bottom butjust in the course of time in what is proving to be a secular bull market for fixed-income. The 10-year T-note gets all the attention. but that is mostly because the Treasury decided to stop issuing 30-year maturities back in 2001, only to revive them in 2005...
[T]he only part of the Treasury curve that has lagged the rally the most. and carries with it the most julce, is the long bond. At 2.7%, it trades at a 110 basis point premium to the 10-year note, and historically that spread is closer to 50bps, so, and we have said this before, the secular bull market in bonds ends once the long end tests 2%, even if the 10-year is now within striking distance of the 1.5% threshold.
So many "pundits" ask who in their right mind would buy bonds at current levels. They were saying the same thing a year ago. The answer is that if the spread reverts to the norm, the long end of the curve will generate a 16% net return in the next year and nearly 25% for the 30 year zero.