The Impressive Bond Market Rally: Examining the Recent Surge in Prices
The bond market has experienced a remarkable rally since the October lows, with Vanguard’s Extended Duration Treasury Index ETF (EDV) soaring over 30%. This surge has boosted investor sentiment and led many to believe that the bear market in bonds, which began in 2020, is now over. However, it is important to approach this rally with caution and not automatically assume that bonds are now in a bull market.
Historical Perspective: Previous Bond Market Rallies and Their Outcomes
It is worth noting that similar-sized rallies have occurred at least twice since the bond bear market started in the summer of 2020. In both instances, the bond market rally was followed by a resumption of the bear market. After the first rally, the EDV ETF dropped by 50% over the next 10 months, while after the second rally, it slid by 34% over the same period. These historical examples remind us that the magnitude of the rally alone does not guarantee a new bull market.
Skepticism and Caution: Why the Recent Rally Doesn’t Guarantee a Bull Market
There is a theoretical basis for skepticism that the recent bond market rally automatically signifies a new bull market. The future direction of the market is not determined by past events but by what happens subsequently. Therefore, the bond market will only go up in 2024 if things turn out better than current expectations. Furthermore, current interest rate expectations for 2024 indicate that the fed funds rate will finish the year at around 3.75%. If this expectation is met, it is unlikely that there will be a significant bond market rally from current levels.
Interest Rate Expectations for 2024: Assessing the Future Direction of the Bond Market
The futures market, as indicated by the CME’s FedWatch tool, suggests that the fed funds rate will decline to 3.75% by the end of 2024. If this expectation is met, it means that current bond prices already reflect this scenario. Therefore, any further rally in the bond market can be expected only if the fed funds rate declines significantly below 3.75%. Conversely, if the rate does not fall that far or even rises from current levels, a resumption of the bear market would be anticipated.
Uncertainty Prevails: The Difficulty in Determining Whether We’re in a Bull Market or a Bear Market Rally
Given the factors mentioned above, it is challenging to ascertain in real-time whether the current bond market rally is the start of a bull market or just another bear market rally. If it were possible to determine this, the market would have already reacted accordingly. This uncertainty highlights the importance of not being overly complacent about the recent rally and remaining cautious about the future direction of bond prices.
In conclusion, while the recent bond market rally has been impressive, it does not automatically signal the end of the bear market in bonds. Historical examples and the skepticism derived from interest rate expectations for 2024 remind investors to approach this rally with caution. Ultimately, the future direction of the bond market will depend on whether economic conditions and interest rates turn out better or worse than current expectations.
Analyst comment
Neutral news.
As an analyst, it is important to approach the recent bond market rally with caution. While it has boosted investor sentiment, historical examples and interest rate expectations for 2024 remind us that the magnitude of the rally does not guarantee a new bull market. The future direction of the bond market will depend on economic conditions and interest rates, and any further rally can be expected only if rates decline significantly below 3.75%. Investors should remain cautious and monitor future developments closely.
