Bill Bonner had a good chart today in his blog highlighting what pensions needed to earn a 7.5% yield in 1995 compared to today.
In 1995 a pension could put everything in the 30-year treasury and be just fine. By 2015 the 30-year could only make up 12% of the overall pension in order to get the same 7.5% return.
The above highlights what Martin Armstrong has been stating for the cause of driving down bond yields. The 2008/2009 crisis scared even more people into government bonds causing the melt up.
Pension funds WRONGLY assumed that government debt was safe, and as a result, many pension funds simply bought 30-year bonds in an effort to match maturity dates for pensions. That led to a strong bull market and the break-even was 8%. They kept bidding to try to lock in rates for pension payment in the future and their lack of management skills led to this 35-year bull market. Rather than picking stocks, they just believe government is the best thing since sliced bread. Now, they can no longer survive with rates this low, which is why the Fed keeps saying we must “normalize interest rates” for we will see a massive wholesale collapse in pensions. Yes, the 2007-2009 crisis helped create the final Phase Transition into a major long-term high in bonds (5,000 low in rates), but it obviously is not responsible for the 35-year bull market in bonds (decline in rates).
Now, if we are quickly approaching the end of the bond market bull run this last part from Porter Stanberry on bond duration will leave you even more squeamish.
Bonds with longer maturities generally have higher durations. This means they’re more sensitive to changes in interest rates. For example, according to Wall Street Journal data, one-year U.S. Treasurys have effective duration of 0.959 years. In simple terms, this means that one-year Treasurys will fall about 0.96% in price for every percentage point increase in yield. By comparison, 10-year Treasury notes currently have a duration of 9.184 years (representing a 9.2% decline for every percentage increase in yield) and 30-year Treasurys have a duration of 20.692 years (representing a 20.1% decline for every percentage point increase in yield).
Putting all the above together: GET THE HELL OUT OF GOVERNMENT BONDS.by