I was around when the greatest bull market ever in bonds began in 1982. The U.S. economy was in the midst of the then-worst recession since the Great Depression. It was the second of two “back-to-back” recessions in 1980 and 1981–82. The U.S. was just emerging from a period of sky-high inflation (over 15% annually) and equally high interest rates (over 20%).

Suddenly, the bottom was in and long-term interest rates started to come down. As you know, bond prices move inversely to bond yields. As the yields came down, bond prices went up. The bull market had begun and it has continued to this day albeit with dips and rallies along the way.

The U.S. 10-year Treasury note just traded near a 1.550% yield to maturity, not far from its all-time low of 1.367% on July 5, 2016. Slowing growth and the Fed’s new rate-cut cycle offer good reason to believe a new low yield below 1.35% will be hit in the months ahead. So why are the bond kings yelling “Bear market ahead!” at the top of their lungs?

According to this article, three of the greatest bond traders on the scene today — Jeff Gundlach of DoubleLine, Dan Ivascyn of PIMCO and Scott Minerd of Guggenheim — are all warning of a coming bear market in bonds. There’s no denying the past success of these “bond kings,” and in fairness their warnings apply as much to corporate bonds as government bonds (it’s possible for credit spreads to widen, producing gains on government bonds and losses on corporate bonds at the same time).

Yet they explicitly see a bear market in government bonds as well. I’ve seen this pattern repeated many times in the past 10 years. Yields hit a new low, some bond maven yells, “The bear market has begun” and then they suffer huge losses when the next leg down in yields commences.

Their reasoning is that yields are so low they can’t go much lower, so they have to go up (and prices down). That’s fallacious. The would-be bears are not distinguishing between nominal yields (the ones you hear about) and real yields (nominal rates minus inflation). It’s true nominal yields are low, but real yields are not. That’s because inflation is also low and getting lower.

Central bankers have told me privately that nominal yields have to come down a lot to get real yields into negative territory to provide stimulus. They’re right. This bull market has much further to run.

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