Wharton finance professor Jeremy Siegel says the 40-year bull market in bonds has finally ended.
“Short rates are going to remain very low. The Fed has virtually promised that for a long time,” he told CNBC.
“But I see a tremendous buildup of liquidity as a result of the measures taken by both the federal government and the Federal Reserve. It’s far more than we ever saw during the financial crisis,” he said.
“Forty years of a bull market in bonds. It’s really hard to turn your head around, and say could this be a turning point? But I think history will say yes,” said Siegel. “I see rates rising continuously over the next several years.”
“It’s been a long, 40-year bull market in bonds,” Siegel said. “It peaked in 1981 with the 10-year [yield] at 16%. I think we will look back at this as the end of the bull market in bonds.”
Meanwhile, longer-dated Treasury yields jumped to three-week highs on Wednesday and the yield curve steepened after the Treasury Department sharply increased the size of its long-dated debt auctions to help finance its rapidly expanding deficit.
Treasury said it will launch a long-planned 20-year bond and increase securities auction sizes across a range of maturities to raise cash to meet record government borrowing needs caused by measures to fight the novel coronavirus outbreak and mitigate economic damage, Reuters reported.
On Monday, the department said it expects to borrow $2.999 trillion during the April-June quarter, five times larger than the previous single-quarter record set during the 2008 financial crisis.
“Treasury seems to be more comfortable bringing a lot more long-dated debt to market," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York, adding that "the size of the 20-year that they announced is actually quite a bit higher than most market expectations were looking for.”
The government said it would sell $20 billion in 20-year bonds. Next week it will sell $42 billion in three-year notes, $32 billion in 10-year notes, and $22 billion in 30-year bonds.
That is an increase of $4 billion in three-year notes, $5 billion in 10-year notes and $3 billion in 30-year bonds compared with its last refunding. Treasury has concentrated the bulk of its increased issuance in short-term Treasury bills, but analysts have said that it will need to increase longer-dated maturities over time.
It was, however, expected to take longer to push out the debt maturities than was announced on Wednesday.
"It's clear that the Treasury is starting to finance out the debt faster than most people anticipated," said Jim Vogel, an interest rate strategist at FHN Financial in Memphis, Tennessee.
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