The Biggest Bull Market In History

What is the biggest, longest and most significant bull market in the history of finance? No, it isn't stocks, gold, oil or whatever else. 

It's bonds - see below.

Yield On 10 Year Treasury Bonds

Yields on 10-year Treasury bonds have been coming down for 37 years, staying inside a very well defined channel from 10.50% in 1985 to 0.50% just last year.

At the same time, federal debt has increased from 44% to 125% of GDP. - see below.

US Federal Debt As Percentage Of GDP

Despite the massive increase in debt, interest rates were going down even faster. Therefore, the cost of servicing the debt dropped from 3.2% of GDP in 1990 to 1.2% in 2015 - see below. 

 Interest Cost On Federal Debt As Percentage Of GDP

However,  interest outlays have been rising sharply since 2015 despite record low interest rates.  Even with near zero rates during 2020, interest costs were at 1.65% of GDP.

Low interest rates have allowed the US economy to constantly borrow and spend excessively without much thought for the future. That's why I called the bull market in bonds the most significant in history - it is ultimately undermining American global preeminence.

During the Reagan years (1980-88) the rise in federal debt was constantly in the news. There was even a "debt clock" in New York's Times Square with numbers changing in a blur. Everyone was anxious about it - and it was at less than 50% of GDP!!  Today, it seems that everyone has forgotten it, throwing trillions around as if they were penny candy. Well, they aren't.

Today's meme is that debt doesn't matter because debt service costs are so very low and we can easily afford them. Yes, for as long as the bond market rally continues this is true - more or less. Rather less, actually, since 2015, as we see from the last chart.

Can interest rates go much lower or even turn negative, as in the eurozone?  I can't really see how they can in the US, barring a total economic collapse with thousands of corporate bankruptcies and debt write-offs. Two reasons:

1. The Fed has been buying $120 billion of bonds per month, yet long term interest rates are rising.
2. Inflation is going up at the fastest pace in decades. It’s all temporary say Fed and Treasury, but it feels more permanent with every passing day.
   

Thus, the trillion dollar question: Is the longest bull market in history over?

Bull markets almost always end in excess. Can you think of a more excessive scenario for bonds than the one that is playing out today?

• Fed is buying 60% of all new Treasury bond issues.
• The Fed's assets (ie bonds) have ballooned from 6% to 35% of GDP in just 10 years.
  
• Both short and long interest rates are way below inflation.
• The US government wants to borrow even more.
• Neo-liberal economists have concocted Modern Monetary Theory to justify even more money/debt creation.
• Last, but certainly not least, cheap consumer goods from China kept inflation low for over 20 years. This is now clearly over. US-China relations are increasingly acrimonious and trade wars will raise import prices.

Let me put it this way: could the above have happened in 1985? I believe that had they attempted anything like it, Reagan, Baker and Volcker would have been publicly crucified in Times Square - right under that spinning Debt Clock.

Finally, some simple common sense, as in The Emperor’s New Clothes: would you right now invest your savings at 2.05% annually, locked in for 30 years? 

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PS Yes, yes, I know.. The Debt Clock was first installed in 1989. I'm using my blogger's artistic license, but just a bit of it :)