The bond market is setting up as the next great contrarian trade. We’ve been calling them the “trade of the decade” for, well… decades.
A “trade of the decade” is a big, long-cycle idea.
Not a quick trade. Not a chart pattern. It is the kind of setup where an entire asset class has been ignored, hated, under-owned or written off for years. Then the underlying conditions change, and the asset begins a long period of outperformance.
The examples are doing the work here.
In the 2000s, gold had been left for dead after a long bear market. Then deficits, war spending, easy money and dollar weakness helped launch a major gold bull market.
In the 2010s, Japan had been written off after decades of stagnation. Japanese equities were cheap, hated and under-owned. Then, corporate reform, monetary policy and foreign capital helped create a long rebound.
Since the early 2020s, our “trade of the decade” has been oil. Energy stocks and oil assets were abandoned after years of ESG pressure, shale busts, underinvestment and the 2020 collapse. Then, supply discipline, geopolitical stress and real-world energy demand brought the trade back.
Bonds may be next.
Since 2009, bonds have been a bad deal for long-term investors after inflation. Enough for Morgan Stanley and JPMorgan to counsel their clients to move out of the traditional 60/40 stock-bond split to 60/20/20 stocks-bonds and gold.
The back story helps.
After the 2008 financial crisis, the Federal Reserve cut rates to zero and kept them near zero for years after the crisis’ anxiety had passed. Bond investors collected tiny, tiny yields. Savings accounts at mainstream banks drop to a fraction of a percent.
In 2020, when government lockdown and aggressive monetary policy kicked in, inflation returned with a vengeance. Bond yields did not protect purchasing power. Anyone who owned long-term bonds through the inflation/rate spike got punished.
So investors left. And rightly so:
Bond returns over the past decade have been historically poor.
When an asset class delivers returns this bad for that long, investors stop caring. Pension funds reduce exposure. Individual investors prefer stocks. Traders ignore it. The asset becomes orphaned.
That’s when the contrarian trade begins to form. Underlying conditions show the bond setup is also getting more interesting as yields rise.
A Treasury bond yielding 1% is not attractive and does not keep pace with inflation. A Treasury bond yielding 4.5%, 5%, or more starts to offer real income again, especially if inflation eventually falls or policymakers manage to force yields lower.
For the past six weeks, Treasury Secretary Scott Bessent has been pulling every lever and pushing every button on his command console, trying to fight the move higher in yields. We’ve written about “yentervention,” the “treasury twist,” and comically Operation Economic Outcast here in Grey Swan.
The $6 billion buyback strategy executed on September 9 is intended to support bond prices and reduce pressure on the long end of the Treasury curve. It failed. Bessent then politely reminded investors he’s got $100 billion where that six came from…
Here’s the contrarian bet setup: When bond prices rise, yields fall.
If Bessent’s twist succeeds, long-term Treasury bonds could rally. If yields fall, long bonds (10-, 20-, 30-year Treasurys) will rise more than short bonds. Bessent’s plan is to let the market work its invisible hand… providing us with a more aggressive way to bet on lower rates.
The alternative is more draconian. It would require a modern form of financial repression in which the Fed and Treasury colluded to control World War II debt repayment from 1942 to 1951. Both Warsh and Bessent have spoken publicly about that period since Warsh took the helm at the Fed in June.
Additional bond opportunities come with the strategy. Corporate bonds, municipal bonds, mortgage bonds, preferred securities, closed-end bond funds and other credit instruments may now offer yields that are competitive with stocks, but with potentially less risk if bought carefully. Andrew gives us a quick way to execute the alternatives in today’s PRO.
Here’s the plain-English version:
Bonds have been terrible for years because rates were too low and inflation was too high. Now yields are high enough to matter again. Investors have abandoned the asset class. Treasury is trying to push long-term yields lower. If yields finally turn down, bonds could produce strong returns from both income and price gains.
~ Addison
P.S. Last week, we brought Zoltan Istvan back on Grey Swan Live! for another riveting examination of the “most dangerous technology humans have ever created.”
“We should have titled this one ‘How AI Is Going To Kill Us All In the Next Decade’,” Andrew joked immediately after we finished recording:
Zoltan has spent the past few months in the Grey Swan Monthly Bulletin outlining the conferences he’s speaking at and what he’s seeing in the world of AI and robotics.
The good news? This technology is transformative, and the world as we know it is shifting rapidly. The conversation wasn’t nearly as dour as Andrew’s remark. The “intelligence revolution” is driving meaningful changes in how we invest and work, helping us stay ahead of the curve.
If you didn’t join us, it’s worth taking a listen to the replay. We fielded a number of member questions. And Andrew suggested a solid investment strategy as killer AI apps dominate the news cycle leading up to midterms.
Ed note: Tomorrow, Zoltan will be moderating several panels at a symposium on Capitol Hill in Washington, D.C., for members of Congress concerned about the rapid development of AI technology and changes in the body politic.
This week, we’re bringing back Ronan McMahon of Real Estate Trend Alert. We continue our exploration of global investing in all its facets, and Ronan is the expert in finding fantastic investment opportunities in overseas real estate – where the prices are much better relative to the value than in most U.S. markets. More details to come!
