“It is impossible to produce superior performance unless you do something different from the majority.” – John Templeton

In the conclusion of our earlier article titled “What deadly summers, Sandy Koufax and lucky golfers can tell us about bonds” we wrote:

“Deflationary forces around the globe are legion.  Despite the battalion of seemingly gargantuan efforts by central bankers to prop up inflation and restart growth, those stated objectives remain elusively out of reach.  Ignoring the truth of these circumstances will not diminish their impact on U.S. yields.”

In that article we proposed that a sluggish economy and ongoing deflationary pressures would continue to drive U.S. interest rates lower. Since we published the article in late March, yields (U.S. and German) have risen despite weaker economic activity and further deflationary signals. The Federal Reserve's perceived stalling of rate increases, pronounced illiquidity and bouts of foreign central bank selling are three of the chief justifications behind the recent increase in yields.  Since the great bull market in interest rates started in October 1981, we have seen numerous short term counter trend increases in rates.  The result each time was curtailed lending, slower growth and a re-emergence of deflationary forces. Ironically, higher yields ultimately resulted in lower yields each time. Despite the low absolute level of interest rates currently, we do not think the down trend in yield is over this time either.

This current bond market sell-off has many of the markings of the so called “taper tantrum” sell-off in mid to late 2013. As in 2013, bond bears are coming out of the woodwork to declare an end to the 30+ year rally. In 2013 the bears believed the end of quantitative easing (QE3) would break the back of the bull market in bond yields. In early 2014, despite QE3 ending and a distinctly bearish bond market tone, bond prices not only completely reversed the losses of the prior 7 months but went on to achieve new lows in yields. There are many factors that lead us to believe the current move higher in yield is a short-term retracement similar to the taper tantrum and other prior counter trend sell-offs. We suggest this instance will once again result in what technicians call a “lower low” in yields.