Newsletter: Is the bond market going wayback?

A recent article in the Wall Street Journal suggested that it might be a good time to discuss the Inflation Level Regime Indicator (ILRI) and what it means for bond yields. In that article the author says that the "rule of thumb was that 10-year Treasury yields should be around 4%, made up of the 2% inflation target plus real yields of 2%, roughly reflecting economic growth." The 2% risk premium was, indeed, the rule of thumb until the Global Financial Crisis (GFC) of 2008 after which many of those rules of thumb stopped working.

But if we are returning to a pre-GFC type of market going forward, then that 2% real yield may be back as well. Just as those of us who had long worked in markets were unprepared for the disinflationary environment of the post-GFC era, so will many people be unprepared for a return to those types of conditions. One of the ways I look at markets through the cycle and regime indicators is how different asset classes behave in those environments. While the future is never exactly like the past, you can learn a lot by examining history. But you often have to go way back, like Mr. Peabody and Sherman, to find conditions similar to the current environment.

In this newsletter we're going to look at real bond yields in the various ILRI regimes and what that may mean for the future. Many industries have grown up in an era of very cheap money. If that's ending, what can they expect?