The 40-year bond bull market in the United States has collapsed, with the prices of long-term U.S. bond funds plummeting by 50% over the past three years. Is it a good time to buy now?

Buying at the bursting of one of the biggest bubbles in history is brave, and it might even be wise. But, as with all market shocks, there is a question of timing.

The continuous three-year plummet of global bond prices and the resulting surge in yields show little sign of abating, and all of this is happening on some of the so-called "safest" sovereign debts on Earth.

There are many reasons: high inflation, a tight labor market, rising policy interest rates, central banks reducing bond holdings, government deficits, and debt levels at historical highs and continuing to rise. The 40-year bond bull market — for some, as slow to inflate as any bubble — has now burst.

Over the past three years, the decline of many U.S. long-term Treasury funds has been staggering. Since the peak of the pandemic in 2020, their price drop has exceeded 50%. This is equivalent to the drop in the S&P 500 index during the bursting of the internet bubble and the banking collapse 15 years ago.

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The benchmark 10-year U.S. Treasury yield has climbed above 5% for the first time in over 16 years, with little sign of peaking so far.

However, survey evidence shows that investors are still buying bonds in large quantities, just as they have been doing for most of the past six months during the continuous plummet. Since March of this year, the 10-year U.S. Treasury yield has climbed nearly 175 basis points.

The influential monthly fund manager survey by Bank of America (BofA) shows that global investors' net allocation to bonds increased by another 2 percentage points this month, marking the sixth consecutive month of net increases in positions, now above the long-term average.

Is this a good thing after bad things? For now, it may be a terrifying contrarian indicator.

It is worth mentioning that, in contrast, global funds have been underweighting bonds for more than 10 years before last December.The last time funds were heavily allocated to bonds was during the banking collapse and economic recession of 2008-2009, when yields were close to current levels, followed by the Federal Reserve's initiation of quantitative easing, stuffing its balance sheet with U.S. Treasury bonds.

Thus, funds may have simply seen a natural top, the ultimate bursting of the bond market bubble of the past 15 years, and the prospect of the Federal Reserve significantly tightening policy, which will ultimately lead to an economic slowdown or even recession, as corporate and household debt pressures will undoubtedly emerge after a credit crunch.

Is the bond market reaching a turning point?

Of course, the creation and bursting of a bond bubble— at least for the highest-rated sovereign nations— is different from the creation and bursting of a stock bubble, even though the short-term performance of bond funds seems to resemble the stock market.

After all, regardless of the secondary market prices, if you hold a bond until maturity, you can usually recover the principal at par value and receive a 5% coupon rate annually.

Expanding the perspective of the bond sector beyond sovereign bonds may be a different game, as you will see other risk factors such as corporate defaults.

However, the Bloomberg Multiverse Global Government, Supranational, and Corporate Debt Index shows that the 12-month rolling total return rate, composed of price and interest, has returned to positive after being in the red for more than two years.

The implied yield of this index has more than doubled in just 18 months, reaching 4.65%, the highest level since October 2008.

For investors who only want to earn interest, or pension or insurance funds that match debt, this is a "big piece of meat" after years of yields below 2% (or close to zero or even lower).

But for bond funds expecting a rebound in short-term price performance, the situation looks more tense.The Bloomberg Multiverse, which has a history of 25 years, actually reached a peak yield of over 6% in June 2000 — a very different landing area.

The timing of this shift could be elusive, depending on the market's view of "higher for longer" policy rates, structural shifts towards economies under high stress, central bank bond sales, and even geopolitical risks and holdings by foreign central banks.

Even if you get all of these right, you are now entering a relatively unknown situation: unprecedented sovereign debt accumulation, a large influx of new bond supply, and the potential twists and turns of trying to control government deficits after the pandemic.

This is why so much attention has recently been focused on the vague "term premium" — a re-emerging risk premium that refers to the compensation required for investors to hold long-term bonds to maturity, rather than rolling over short-term bonds within the same period.

Although experts disagree on the measurement of the term premium and its direct causes, the model favored by the New York Fed shows that the term premium has been negative for most of the past eight years, but it is now back to a positive value, reaching about 30 basis points.

Others estimate this number to be much higher.

Olivier Davanne of Risk Premium Invest, a consulting firm based in Paris, said that according to his "buy-and-hold risk premium" model, the yield on 10-year U.S. Treasury bonds has risen by 106 basis points since mid-year, with about 90 basis points attributed to the term premium and only 16 basis points related to more aggressive long-term policy rate pricing.

According to his calculations, the term premium for 10-year U.S. Treasury bonds is higher than at any time since the 1990s, and it is 100 basis points higher. There are many reasons for this, including unpredictable debt supply dynamics, geopolitics, uncertainty about inflation prospects, and lingering concerns about the correlation between stocks and bonds over the years.

With so many variables taking effect in a short time, finding the key turning point in the battered bond market may be extremely difficult.

"In the context of 'higher for longer' interest rates, it is difficult to have a firm view on the direction of this key market in the coming months," Davanne said, adding that he "certainly cannot rule out the possibility of further significant increases in long-term yields."