Is the Bond Market About to Implode? | Treasury Analysis

Ajouté : 2026-05-21

[00:00:00]We are potentially on the cusp of a significant breakdown in the bond market. But I'm going to tell you why all may not be lost. We're at critical levels right now, and that's what we're talking about today on this episode of the Million Dollar Question.

[00:00:21]Good morning, everybody. It is Thursday, May 21st. Thank you for joining us for this very special edition of the Million Dollar Question. I'm Steven Boitsel, managing partner, Revelry Wealth Management, coming to you from the island of Oahu. So, mahalo for joining us for this discussion about the bond market and how we sit at some very critical levels right now that not only impact bonds, but could potentially impact other areas of the market as well. But perhaps not all is going to be lost. So, let's dive in and let's take a look at where the bond market sits right now.

[00:01:02]So, we're going to begin looking at the trend of the US Aggregate Bond Index.

[00:01:07]And I have to say that even though it appears we are losing an uptrend that has been in place for probably close to a year and a half for the bond index, we are still looking at an incomplete candle here. And I have got to stress that. We always want to allow these candles to finish. Now, we're looking at a weekly time frame here because we at Revelry believe that a weekly time frame is probably the time frame that best serves our clients and in terms of identifying the trends in the asset classes, it gives us the opportunity to maybe catch the earlier part of a move and and potentially exit at a little faster rate than if we were looking at something like a monthly or certainly even a quarterly type of a candle here, but we need to allow this candle to finish itself out. But, if it finishes where it stands right now, then the bond market is going to be entering into a downtrend.

[00:02:12]And not only is that something that investors should note for their fixed income exposure, but the potential spillover effects that could happen into other asset classes.

[00:02:22]Now, a lot of the concern has been what's going to happen with interest rates as far as the Federal Reserve is concerned.

[00:02:31]There was a lot of bullish sentiment coming into this year knowing that Jerome Powell was going to be on his way out. Kevin Warsh, once he was nominated by the Trump administration, he was supposed to be more of a yes-man for the Trump administration. He was supposed to come in with an idea of looking for easier money, bringing rates down. And a lot of investment strategists on Wall Street thought that we would continue to see a series of rate cuts in 2026 and into 2027.

[00:03:06]Some very large bond managers thought we might have as many as five interest rate cuts in 2026.

[00:03:13]And even the Fed funds futures were suggesting that we might see a series of rate cuts.

[00:03:21]But, as I've mentioned a number of times on this program, I don't think that the Fed funds futures are actually a very reliable way for investors to get a sense of where interest rates are headed from a policy perspective. Our best reflection of that is really looking at the front end of the US Treasury curve. You can look at the 12-month bill, you can look at the two-year note yield, and those are really a good representation of where Federal Reserve interest rate policy is likely headed. So, we're looking at a history here of the the 12-month bill going back a number of years, and I just want to note a couple of things here.

[00:04:04]So, I want to start with when the Fed started raising rates. So, we saw that interest rates bottomed in 2021, and the yield on the on the 12-month bill, that is, bottomed in the middle of 2021, and it started rising substantially. As a matter of fact, by the time the Federal Reserve raised rates for the first time in March of 2022 by a quarter of a percent, the yield on the 12-month bill had already exploded higher. That was your tell that the Fed was well behind the curve, and ultimately Fed funds caught up to where the yield on the 12-month bill ended up trading to north of 5%.

[00:04:52]Now, we traded all the way down to around 3 and 1/2 on the 12-month bill, but as we can see here, recently those yields are starting to pick back up, and we're now north of 375 on the yield of the 12-month bill.

[00:05:11]What's important there is that currently the range of Fed funds is between 350 and 375.

[00:05:19]If we see this yield tick above 375 and stay there, that's a pretty good indication that we're going to see the Fed within the next 12 months raise rates probably one time.

[00:05:33]If we start to see it tick up above four, that's a good indication that we're going to get maybe a second interest rate increase in that same 12-month period.

[00:05:44]So, we want to be on the lookout here but a lot of the closely held notions that a lot of investors or investment strategists had coming into 2026 that we were going to see interest rates decline, Fed funds were going to be coming down.

[00:05:59]That has not been corroborated at all this year looking at the yield on the front end of the Treasury curve. And I think if we continue to focus on that, we're not going to have to worry about the opinions and prognostications of the ivory tower, so to speak. We just want to align with what the market is telling us. And the market has been telling us we're not going to get any Fed cuts here this year. And as a matter of fact, we are on the verge of probably seeing interest rate increases, at least one, within the next 12 months. We want to continue to focus on this very closely.

[00:06:36]Now, I want to check in on the duration of your portfolio. So, we want to look at the short end versus the longer end of the yield curve. So, here we're looking at the price of the two-year Treasury and comparing it to the 20-year Treasury. And we are down at some very critical levels. Now, what we see here is that over the last couple of years as this has as this ratio has been in a persistent downtrend, this would have been telling us that we want to favor shorter duration in our bond portfolio.

[00:07:11]But now we find ourselves at a level that has acted as support for several decades at this point in time.

[00:07:22]I cannot stress how important this level is. If we lose this level, and we are very close to doing so, then we will be in a new regime for the bond market.

[00:07:36]We will have We have wanted to have less duration in our bond portfolio for the last several years.

[00:07:42]But, we may just be getting started on that trend of longer-term interest rates rising much more quickly than they do on the short end of the curve.

[00:07:53]Now, not all is lost here. Here's one thing that I want to point out.

[00:07:58]We do have a bullish divergence in momentum here as we are retesting these prior lows.

[00:08:05]So, if duration is ever going to start carrying its weight in your portfolio, this would be the time for it to happen.

[00:08:17]This could potentially be the catalyst, this bullish divergence in momentum as we're retesting these prior lows, perhaps this digs in.

[00:08:25]And perhaps we start to see this go the other way.

[00:08:28]Price is not telling us that. It's only looking at the relative strength index that we're getting a sense that maybe this is trying to firm up. But, if we lose this level right here, there's going to be a lot of turmoil in the bond market. So, we want to watch where this goes very closely.

[00:08:50]Now, when we look at things like credit spreads, when we're comparing high yield to Treasuries, this is not alarmist at all.

[00:09:01]If we were going to see a meltdown across the bond market in mass, then we would not be seeing this ratio on the cusp of breaking out.

[00:09:12]We would see it rolling over, and we would see it down here. Now, we need to be able to get through these former highs.

[00:09:19]And if we can, then credit may be doing, at least public credit, may be trading better than a lot of us would think. So, even those spreads are really tight, they are historically really tight, they're doing pretty well. They're one of the better performing areas within the bond market right now.

[00:09:44]Here's one other point that I want to make.

[00:09:47]You know, high-yield bonds or junk bonds as they're referred to, a lot of folks have always been more skeptical about investing in that area because of the idea that they're investing in junk. They're investing in companies whose debt is not rated investment grade.

[00:10:07]But, I have to tell you, even some of the worst corporate uh bond issues out there, their finances might be in a better place than the US government.

[00:10:19]Now, those companies don't mint their own currency.

[00:10:22]Noted. But, uh even these companies that have below investment grade ratings for their fixed-income issues, their bonds are trading better than US Treasuries. So, uh this is going to be another one of those examples where when the denominator is in this case a US Treasury bond, a longer-term US Treasury bond, then maybe everything's going to look pretty good against that if nobody wants to own that asset class.

[00:10:53]So, uh but again, not not in the alarmist message coming out of credit spreads right now.

[00:11:02]If we're able to resolve higher right here, that probably portends some good things for the economy, but interest rates may still be going higher in that scenario. So, I don't want us to take away from this that there's any there's any uh any benefit for rates potentially coming down here if this breaks out. Uh this would simply let us know that credit is performing better than sovereigns, and that investors would be looking to add on risk appetite in that environment. So we want to watch where this goes closely going forward.

[00:11:42]Another ratio that we need to be focused on right now is that inflation and the expectations that investors have about inflation are continuing to pick up. But we find ourselves at a very important level here in this ratio between tips and nominal treasuries. And we're going to see here momentarily this chart looks eerily reminiscent of the Bloomberg Commodities Index. But we are at a level right now where if we take out these former highs from 2021, 2022 then we could go substantially higher here in this ratio of tips versus treasuries. There's a lot of market memory here. This used to be support before the financial crisis. It broke.

[00:12:29]We have been trapped below that level for 18, 19 years.

[00:12:35]So a very critical level here in this ratio if again, if it breaks out, we're going to be expecting that inflation expectations are going to become unanchored.

[00:12:49]But even though we're starting to get overbought here which would lead me to uh put myself in a little bit of the bullish camp that perhaps perhaps this breaks out.

[00:13:03]We do have a little We do have a bearish divergence in momentum that has formed here over time. So it there is the possibility that this is a last hurrah for inflation expectations. If we cannot get above this level. But we have knocked on this door a couple of times, right? This is really is third time that we've knocked on this door to try to get back through that former level of support.

[00:13:32]The more times that that level is tested, the higher the likelihood that it breaks. Uh it may not have to be this time, but we want to watch how this resolves very carefully.

[00:13:46]As I mentioned, that chart of TIPS versus Treasuries, very reminiscent of what we see in the Bloomberg Commodities Index back at those 2022 highs. This one is already trying to break out. And so perhaps this is the leading indicator that we're going to see inflation start to pick up, that those inflation expectations are going to become somewhat unanchored, and that's going to have an impact on your fixed income portfolio.

[00:14:18]Think we talked about this last week. We take this level out right here, our next target is these former highs from 2008, which is still a decent ways north of where we stand right now. So all these things are interrelated, and we want to watch for confirmation both from the chart of the Commodities Index, as well as that ratio between TIPS and nominal Treasuries, that we are indeed seeing inflationary pressures accelerate, and that's going to warrant the way that we position ourselves with the fixed income portion of our portfolio.

[00:14:55]So here are some key takeaways from our discussion today.

[00:14:58]The US bond market, it's breaking its uptrend.

[00:15:02]Now we want to make sure that we give that candle time to complete, but right now the weight of the evidence does not look good for the bond market.

[00:15:10]The front end of the Treasury curve, that's your best barometer for where Fed policy is going. Mute all of the noise, whatever the strategists are saying about the Fed's going to raise this many times, cut this many times. Forget it.

[00:15:24]We just want to focus on where yields are on the front end of the curve. The Fed's going to follow those around really really closely.

[00:15:33]Longer duration Treasuries are not only breaking down on an absolute basis, but they may be breaking down on a relative basis as well.

[00:15:43]If we cannot hold those levels that have been support for 20 plus years, then we are really going to be entering into a new era of the way that the bond market trades.

[00:15:58]Something that most of us have never seen. Uh I wrote about that a lot in my white paper, Pavlov's New Dog, that the bond market has been in a downtrend as far as yields are concerned for 40 years. That's many careers. And so nobody is managing money today that was managing money the last time we were going through an interest rate increasing cycle.

[00:16:25]And so there are a lot of preconceived notions, the way that investors approach the market as far as their fixed income exposure, and they expect it to be a ballast to the equity risk in their portfolio.

[00:16:37]We may not live in that world anymore.

[00:16:40]And if we can't hold that level of short versus long-term Treasuries, then we're just going to be getting started.

[00:16:48]Now, credit spreads, as I mentioned, not throwing up any red flags right now.

[00:16:53]As a matter of fact, they're kind of they're kind of giving us the green light.

[00:16:58]So, we've got a little bit of mixed messaging right there in that we're seeing duration sell off, sovereign selling off, public credit trading pretty well.

[00:17:09]So, uh we we want to understand that perhaps investors are looking for more risk in their portfolio. They're risk seeking right now. They're not risk averse right now. They're actually seeing more risk in sovereigns than they are in public credit.

[00:17:29]Inflationary pressures could be coming unanchored. So, we got to be very careful there.

[00:17:34]Uh perhaps you want to own some tips in your portfolio, but you certainly want to have less duration in your portfolio to be able to manage the price changes with the fixed income in your portfolio as interest rates start to rise.

[00:17:51]And lastly, if we're getting a if we're getting a breakout in inflation expectations, commodities are likely to do pretty well.

[00:18:00]They're probably going to do better than cash, but cash is probably going to do better than bonds. So, understand that cash is a position in your portfolio. It is the shortest duration that you can achieve with your fixed income. So, I want you to be mindful of that that even though the yield that you might get in an institutional money market may only be 3.5, 3.6, somewhere in there right now, and that's going to be less than what you would get in say a five-year Treasury or a for a five-year corporate bond, if interest rates are going up, you may be better off in cash yielding 3 and 1/2 to 3.75 over the next 12 months. So, just be mindful that cash is a position. It does belong in your portfolio at certain times, and it may be a better place for you to park money than the fixed income market, but it may still underperform inflation, may underperform commodities. So, understand commodities also an asset class that's largely been abandoned.

[00:19:15]I've heard JC talk about that on the morning show several times over the last couple of weeks that when we came and we were in our formative years in this business, there were three asset classes. There were bonds, there were stocks, and there were commodities.

[00:19:31]Most people have gotten to the point now where they're only focused on two.

[00:19:36]Don't forget about commodities because they can play a key role in your portfolio. So that's all that I've got for you today. Thank you so much for tuning in for this latest installment of the Million Dollar Question. If you're interested in our slides, feel free to shoot us an email [email protected].

[00:19:55]Send us questions, uh challenges that you're dealing with out there as an investor, as a financial advisor. Happy to help how we can.

[00:20:02]But thank you so much for tuning in, joining us for this very special edition of the Million Dollar Question. I'm Steven Whitezel. I'll see you next week.

[00:20:10]Take care.

[00:20:18]>> [music]