Are we at the end of the 30 year Bond Bull Market?

Dear PGM Capital Blog readers,

Since the election for Mr. Donald Trump as the 45th president of the U.S.A., interest rates are rising in the USA and the rest of the world.

As can be seen from below chart, the yield of the USA 10-year note has increased from November 8 up to Friday November 18, from 1.862% to 2.335% an increase of approx. 25.4% in just 10 days.

Based on the inverse relationship between bond’s price and its yield, we can conclude that since Mr. Trump has been elected as USA 45th president the bond market sold-off massively.

USA MORTGAGE RATE AT 17-MONTH HIGH:
Based on the fact that U.S. Treasury bills, bonds, and notes directly affect the interest rates on fixed-rate mortgages, mortgage rates in the USA for the average 30-year fixed-rate mortgage hit 4.125% on Friday, November 18, the highest since July 2015.

That is more than half a percentage point higher than on election day as can be seen from below chart.

PGM CAPITAL ANALYSIS AND COMMENTS:
The main reason for the jump in the yield of the 10-year note and subsequently the 30-year mortgage rate, is the big promise of USA president elected Mr. Donald Trump, pledge to work with lawmakers to introduce legislation to “spur $1 trillion in infrastructure investment”, which is highly inflationary.

Mr. Trump plans also to reduce taxes in order to increase economic growth by government spending, remind most of us of a similar plan by president Ronald Reagan, in the eighties, which later on was called Reaganomics.

Below 100-year inflation chart of the USA, shows how Reaganomics has triggered, in 1980, the highest inflation rate in peace time in the USA.

As a consequence of this, the Federal Reserve board led by Mr. Paul Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981 as can be seen from below chart.

Based on this, the price of Gold, – the ultimate hedge against inflation – rose to US$ 850.00 an ounce in January of 1980, which corrected for inflation is equivalent to US$ 2,106.45, as can be seen from below chart.

The above chart shows also that the hyperinflation cycle of the 1980′s has triggered a massive recession in the early 80′s.

History normally repeats itself, if this is the case, we can expect Trumponomics to have a similar effect as the Reagonimcs had in the 80′s, on the interest rates, and subsequently on the price of gold, global capital markets and state of the world economy.

Higher interest rates in the 80′s lead also to a higher US-Dollar as can be seen from below chart.

History shows us also that higher interest have lead to; housing market, bond market and stock crashes, and that the combination of higher rates and US-Dollar had lead to bankruptcy of those developing countries, which has borrowed in US-Dollar in bonanza times to finance ambitious government plans.

For the sake of humanity let’s hope and pray that history will not repeat itself this time and that Trumponomics will not become Reaganomics on steroids.

Until next week.

Yours sincerely,

Eric Panneflek