Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 529

Is this the start of a generational bear market in bonds?

At the start of this year, fund managers and individual investors piled back into bonds. Suddenly, bonds had a decent yield. And they’d just endured their worst annual performance on record, which surely meant reversion to the mean would see them bounce back.

Yet that hasn’t happened. Bonds are possibly heading for a third straight year of losses, which is unprecedented over the past 100 years.

What’s surprising is that investors are so surprised by these events. After all, what happened before this period was itself unprecedented, with bond yields turning negative in many countries, something that has rarely happened. A snapback from these extraordinarily low yields was inevitable.

And if you zoom out from the current noise, bond market cycles tend to last 30-40 years. Bond yields came down for 39 years from 1981 to 2020. 2020 likely marked the beginning of a long cycle of rising yields. Commentators now talk about yields and rates being ‘higher for longer’, meaning perhaps higher for another 12 months. What they should really be saying is that yields could be going higher for a lot longer, if history is any guide.

It’s a bond bloodbath

If you thought bond were due for better times this year, you weren’t alone. Fund manager expectations for lower bond yields hit 20-year highs in April this year, and still hover near those highs.

It hasn’t turned out well for many of these managers with bonds again in the red this year. If the trend continues and bonds finish down again this year, it would be the third consecutive year of losses, something that hasn’t happened over the past century.

And it's the worst three year stretch for US aggregate bonds on record.

Why are bond yields continuing to rise?

As noted in a recent article by Morningstar’s Tom Lauricella, there are several factors behind the continuing rise in bond yields:

US economic strength. While America is slowing somewhat, it’s nowhere near as much as economists expected 12 months ago. And the economy appears to have picked up this quarter. The Federal Reserve Bank of Atlanta’s GDPNow measure—measuring the current pace of gross domestic product growth—suggests third-quarter GDP will be 4.9%, up from the 2.1% in the second quarter. If right, it would also be the strongest rate of quarterly GDP growth since the end of 2021. The US job market is especially strong, with recent initial job claims coming in at 201,000, a very low number.

Central bank expectations for fewer interest rate cuts in 2024. Given the economic strength, it’s no surprise that the US Federal Reserve and other central banks are starting to talk about fewer interest rate cuts for next year. Recently released Fed forecasts show the funds rate at 5.1% at year-end 2024, which would imply a half-percentage-point cut at most.

US net debt issuance. At the end of July, bond investors were caught off-guard when the Treasury announced a significantly larger need to raise money than what they expected. The US government now expects to raise a net $1.007 trillion through bond sales in the third quarter—the largest-ever cash raise during a third quarter. With this announcement, the supply/demand dynamic of the bond market was thrown off balance as bond dealers and investors factored in the additional amount of bonds entering the market while the fundamental backdrop was worsening.

I would also add other factors:

Sticky inflation. In the US and elsewhere, inflation isn’t coming down as quickly as many had expected. In fact, it’s going up again in some countries, such as Australia. Here, the annual headline consumer price index climbed to 5.2% in August from 4.9% a month earlier.

Excess savings being worked through. What’s continuing to be underestimated is the enduring impact from money printing by central banks during Covid. The banks printed US$8 trillion, financing roughly the same amount of government spending, and directly monetizing the largest peacetime deficits in US history. Sticky inflation is the hangover from this money printing.

A 40-year bond market cycle?

While everyone focuses on the short-term rise in bond yields, it pays to put them into context.

Source: Trading Economics

There have been three long-term bond market cycles for US government bonds over the past 100 years. The first cycle started after World War One. Bond yields peaked just above 5% in 1921. Due to deflation from the Great Depression and a cap on rates to finance World War II, yields dropped to 2.48% in 1954. That ended a 33-year bull market in bonds.

From 1954, the second cycle began. Though yields didn’t really pick up until the 1960s when inflation started to rise, partly due to Lyndon Johnson’s government spending on an ambitious domestic agenda and the Vietnam War. Inflation and bond yields went even higher in the 1970s before Fed Chairman Paul Volcker hiked rates above 20% to squash inflation in the early 1980s. That ended the bond bear market of 37 years.

The third cycle started in 1981 with US 10-year bond yields close to 16%. From that high point, yields fell to just 0.5% in mid-2020. A 39-year bull market for the ages, helped by deflationary forces including globalization, China’s entry into the World Trade Organisation in 2001, favourable demographics, among other factors.

It’s likely 2020 marked the start of a new bond market cycle. Whether this one is a long-lasting as those previously remains to be seen. There are no scientific laws to suggest that market cycles should last 30-40 years. Rather, they’re a historical pattern that we should pay attention too.

It could be a volatile period

If we have entered another long-term cycle of rising bond yields, it doesn’t mean that yields will continue to rise in a straight line. Far from it.

During the last major spike in inflation during the 1970s, there was extreme volatility in inflation, interest rates, and bond yields.

From the mid-1960s, US inflation went from below 2% to more than 6% in 1971. Then it went down again as President Nixon announced a 90-day price and wage freeze, and an end to US dollar-gold convertibility. Then in 1973, there was the first oil shock which drove oil prices from US$3 a barrel to US$12 a barrel. After monetary tightening in 1975, inflation again fell sharply, before a second oil shock in 1979 sent inflation flying again.

It was a similar story in Australia.

There wasn’t one inflationary cycle in the 1970s. The period saw inflation turn to deflation and back again very quickly. It was a stop-start cycle.

When inflation came sharply down, central banks dropped rates and printed money to prevent deflation. And when inflation spiked again, they slammed on the monetary brakes to bring it down again. But it took over a decade for them to get inflation under control.

The silver lining in inflation

Believe it or not, inflation can serve a purpose. It’s a way to correct economic imbalances. It’s a painful way but can be the only option if governments and central banks don’t take action to correct unsustainable imbalances built up over many years.

Currently, governments and individuals have taken on an enormous pile of debt, and one way to reduce that debt is for interest rates to be kept below the rate of inflation for a period of time – otherwise known as financial repression. It’s what happened post-World War Two and it could well be happening now.

What it means for your portfolio

Noone knows what the future holds. If history is a guide though, we could be three years into a multi-decade bear market in bonds.

What does that mean for your portfolio? It doesn’t mean that bonds won’t improve from here. Three down years for any asset class is rare, and when they happen, they usually result in a sharp, short-term bounce, as table 7.9 below shows.

That means a comeback for bonds in the next 12 months wouldn’t surprise.

The other bit of good news for bonds is that five year returns on bonds are highly correlated to their starting yield. Put simply, if you buy a 10-year bond at close to a 5% yield, that yield is likely to be your total return over a five-year period.

The problem is that this measures nominal bond returns not real returns. The difference between nominal and real returns is inflation. And inflation is a killer for bonds.

For example, during the 1970s, real bond returns in Australia were deeply negative, and they were only marginally positive for global bonds.

Given current sticky inflation and the potential for a long-term bear market, bonds may have a hard time of it from here.

From the chart above, you can see that equities don’t like high inflation and bond yields either. What the chart doesn’t show though is that certain types of stocks performed well during the 1970s. Namely, value stocks and real assets.

Why did value and commodity equities perform well during the 1970s? As asset manager GMO notes, you were effectively buying cheap real assets, which is a like being offered inflation insurance at a discount.

On the flip side, buying expensive growth stocks is akin to buying inflation insurance at a substantial premium. It’s a warning signal for those investors currently enthused by the ‘Magnificent Seven’ US tech stocks, and other highly priced equities. Inflation and higher yields aren’t friendly for these types of assets.

 

James Gruber is an assistant editor at Firstlinks and Morningstar.com.au. This article is general information.

 

RELATED ARTICLES

A closer look at defensive assets for turbulent times

Why allocating more to fixed income now makes sense

The time for bonds has come

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

The 2025 Australian Federal election – implications for investors

With an election due by 17 May, we are effectively in campaign mode with the Government announcing numerous spending promises since January and the Coalition often matching them. Here's what the election means for investors.

Latest Updates

World's largest asset manager wants to revolutionise your portfolio

Larry Fink is one of the smartest people in the finance industry. In his latest shareholder letter, the Blackrock CEO outlines his quest to become the biggest player in private assets and upend investor portfolios.

Economy

Australia's economic report card heading into the polls

Our economy grew by a nominal rate of 7% per annum from 2017 to 2024, but it benefited from the largesse of fiscal and monetary policies, both of which are now fading. We need a new, credible economic growth agenda.

Preference votes matter

If the recent polls are anything to go by, we are headed for a hung parliament at the upcoming federal election. So more than ever, Australians need to give serious consideration to their preference votes.

SMSF strategies

Meg on SMSFs: Tips for the last member standing

It’s common for people as they age to seek more help in running their SMSF if their capacity declines. An alternate director may be a great solution for someone just planning for short-term help in the meantime.

Wilson Asset Management on markets and its new income fund

In this interview, Matthew Haupt from Wilson Asset Management discusses his outloook for the ASX, sectors such as REITs that he likes, and his firm's launch of a new income-oriented listed investment company.  

Planning

‘Life expectancy’ – and why I don’t like the expression

Life expectancy isn't just a number - it's a concept that changes with survival rates over time. This article breaks down how age, survival, and societal factors shape our understanding of life expectancy, especially post-Covid. 

The shine is back on gold, and gold miners

Gold mining stocks outperformed in 2024 and are expected to do well in 2025. At this point in the rally, it's worth considering what has driven gold prices higher and why miners could still have some catching up to do.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.