🔒 Bull market in bonds that no one saw coming – With insights from The Wall Street Journal

Incredible as it might seem, on that day and at those rates you probably would have turned my offer down. Most of the time in markets, hindsight is 20/20, but foresight is legally blind.

Sept. 30, 1981, turned out to be the exact day long-term U.S. interest rates peaked, ushering in a multidecade bull market in bonds.

We know that now, precisely 40 years later. All anyone knew then was that bond prices, which move in the opposite direction of yields, had just set yet another record low.

The next day, the Alaska Housing Finance Corp. ran what looked like a proud “tombstone” ad in The Wall Street Journal commemorating a successful offering for those mortgage bonds.

In fact, the deal was a dud, with “only about half sold” by day’s end, our reporter Tom Herman pointed out on Oct. 1, 1981. “Bond salesmen say they are having an increasingly difficult time persuading investors to buy long-term bonds even though many debt issues today offer record yields.”

Added a senior Wall Street executive: “It’s been a dreadful week—and it’s only Wednesday.”

The prices of some government bonds had dropped as much as 17% in the previous three months, including a 6% plunge the prior week in September.

For years, “bonds had been going down and down and down and down,” recalls Dan Fuss, then a 48-year-old portfolio manager and now vice chairman at investment firm Loomis Sayles & Co.

Between September 1977 and September 1981, the yield on outstanding long-term corporate bonds had shot from 7.92% to 15.49%.

“Younger people might say today, ‘That’s impossible, bond markets don’t move like that, don’t collapse like that.’ Yes, they can!” Mr. Fuss says.

Wall Street firms, then nearly all organized as partnerships, were reluctant to risk their capital to support a faltering market. Sellers, often facing huge haircuts on their bonds, were loath to lock in a loss by selling. Buyers, convinced rates would keep rising, locked up their wallets.

“Liquidity was terrible,” recalls Bill Gross, co-founder of the giant investment firm Pimco, now a private investor. Some of his clients, while they’d done well at Pimco, had lost as much as 50% elsewhere in their bond portfolios.

“I didn’t know how long they would stay with us if they kept losing money like that,” Mr. Gross remembers. “You’d go home at night and just wonder why the hell you should bother going back in the morning.”

Mr. Gross was nevertheless bullish, as was Mr. Fuss, given how cheap bonds were. But, with short-term money-market funds yielding 17% or more, the vast majority of investors had no appetite for long-term bonds. “The [credit] markets might become comatose,” E.F. Hutton & Co. President George Ball warned in the Journal on Sept. 28, 1981.

In exactly 40 years, we’ve come almost precisely 180 degrees.

The last week of September 1981, almost nobody thought interest rates would go significantly lower. Up until a few days ago in September 2021, almost nobody believed interest rates could go significantly higher.

On Sept. 30, 1981, to get investors to buy $1.75 billion in 20-year Treasury bonds, the U.S. government had to offer them at a 15.78% yield—more than 2 percentage points higher than a similar issue had yielded in an auction two months earlier.

Even today, nobody has a clear explanation of why bonds suddenly seemed more attractive on Oct. 1, 1981, than they had the day before.

Over the next six trading days, long-term yields fell more than a full percentage point. By Thanksgiving, they dropped below 13%—one of the sharpest declines in history. By Sept. 30, 1982, the 20-year Treasury yield shrank to 11.65%. By the same date in 1986, it hit 7.55%—more than 50% below its peak just five years earlier.

The inescapable lesson of Sept. 30, 1981, is that markets can keep moving in the same direction longer than anyone can imagine—and then shoot explosively in the opposite direction when no one expects it, impelled by forces no one may ever fully understand.

On a long-term chart of bond yields today, Sept. 30, 1981 looks like one of the most glaringly obvious turning points in financial history.

On that day, however, it was just another dark data point in a miserable, seemingly endless slog. Because we can see the past as clear as day, it’s all too easy to forget that the future is always enshrouded in fog.

“Things can’t go on forever at these rates,” says Mr. Gross. “Interest rates can’t stay this low [net of inflation] because savers, whether it’s Mom and Pop in Des Moines or big pension funds, can’t earn anything on their investment.” He adds, “For the economy to survive, at some point interest rates have to regain some semblance of an attraction to savers. Otherwise the savings function will be destroyed.”

No one knows when that time will come—but come it will.

Appeared in the October 2, 2021, print edition as ‘The Biggest Day In Bonds That No One Noticed.’