Its not often that I blog twice in as many days...usually not even twice in one month. But, given the move in the bond market today (rates lower), I thought I would try to explain our views on long-dated gov't bonds.
We will look at the shape of the yield curve in Canada the last time the Fed went through a rate hike cycle.
They started to hike Fed Funds in Mar 2004 (dark green dotted line...notice the positive slope?) and ended in June 2006 (light yellow dotted line). Note how the yellow line in 2006 is totally flat? That represents about a 90bp move in 30yr bonds over that 2.25 year period. A huge move by any standard.
Now the bottom of the chart shows the yield curve as of today in a dark green solid line. The curve has already flattened a fair bit but our expectation is that it will flatten a whole bunch more. We bought 30yr bonds a few weeks ago at 2.07% and today they are at 1.90%, which represents over a 3% move...but that could end up being nothing compared to if the curve flattens like we think it will. These long bonds could drop to 1-1.50%. It is highly unlikely that there are too many participants in the market looking for such a move...which is why it should get there.
(Full disclosure - Scott and I do tend to be somewhat contrarian. As Sir John Templeton famously said, "If you want to have a better performance than the crowd, you must do things differently from the crowd". At High Rock, we think we do things a lot differently than the crowd).