In December 1996 then-Federal Reserve chair Alan Greenspan gave his famous “irrational exuberance” speech, in which he questioned hot stock prices and extended valuations following a bull market that began in the early-1980s.
While prices in the dot-com bubble did get out of hand, that irrational exuberance lasted for another three-plus years, finally slowing down in March 2000. From the time of Greenspan’s speech until the market peaked just after the turn of the century, stocks would be up nearly 100%.
Greenspan would also be early in his call for a bond market bubble. In an interview with Bloomberg in the summer of 2017, Greenspan warned, “By any measure, real long-term interest rates are much too low and therefore unsustainable. When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”
When Greenspan called the bubble in bonds, the 30-year Treasury rate was close to 2.9% while the 10-year was yielding just 2.3%. Both rates were extremely low by historical standards. Both U.S. government bond yields finished the day Monday with rates below 1%, with the 10-year fast approaching zero.
The point here is not to call out Greenspan for poor timing on his market calls. There have been plenty of other economists, investors, and market prognosticators who have been calling for a floor in yields for years now.
And who could blame Greenspan for his rising rates call? Bond yields have now been falling for nearly 40 years! Paul Volcker, Greenspan’s predecessor at the Fed, raised short-term rates in the early-1980s to new heights to stave off sky-high inflation that began in the 1970s. Longer-term rates followed suit, with both the 30-year and 10-year yield topping out at more than 15% by 1981.
This set off what might be the most impressive bull market of all-time. Consider the returns in bonds in both the pre-1981 and post-1981 periods:
From the late-1920s through the early-1950s, interest rates in the U.S. were stuck in the 2% to 4% range. Rates slowly moved higher from there until reaching those double-digit levels in the 1980s after rising steadily throughout the 1970s. Low rates combined with rising rates produced boring, yet respectable long-term returns in the bond markets from 1928-1980.
Coming off the high starting rates in the early-1980s and falling ever since, bond returns have been nothing short of spectacular. And it’s not just the returns of bonds but the volatility profile that make this such a once-in-a-lifetime bull market.
The Bloomberg Barclays Aggregate Bond Index offers a good proxy for the broader high-quality bond market in the United States. Since its inception in 1976, the index has had just 3 down years out of 44 in total through the end of 2019. And those three calendar year losses were declines of just -2.9%, -2.0% and -0.8%.
Annual returns were 7.3% through the end of 2019 and that includes the period of rising rates in the late-1970s/early-1980s. And volatility in bonds was just 40% of the swings seen in the S&P 500 over that time while the returns equated to more than 60% of the S&P’s 11.3% annual performance.
This has been an extraordinary run, potentially one of the most impressive bull markets in history. It’s certainly the longest bull market we’ve ever witnessed.
Stocks are getting hammered this year so many investors probably haven’t been paying as much attention to what’s going on in bond land. The stock market is sexier than fixed income because of the way the two asset classes are structured, so bonds rarely grab the headlines the way stocks do.
Rates are so low at the moment that the bull market has to end at some point, regardless of the path forward. With yields of around 1% or lower, it’s all but guaranteed that bonds will provide much lower returns over the long haul from here. Indeed, investors need to prepare themselves for a future in which, quite possibly, the coming decades produce the lowest bond returns the U.S. has ever seen.
Ben Carlson, CFA is the Director of Institutional Asset Management at Ritholtz Wealth Management.He may own securities or assets discussed in this piece.
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