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We first began talking about the possibility of 3% long-term government rates as long ago as 1995. Most didn’t believe us then and most continue to expect inflation and interest rates to advance upward over the next several years. Now we realize that most of us do not have forever to capture long-term gains. That has always been the problem with long-term performance tables and charts. Unless we are born with a silver spoon in our mouth, about 25 years is the longest time we have to achieve investment success. That is why one should look inside the long numbers for rolling periods of time. In regard to that, we suggest you get Ed Easterling’s book on investment returns Unexpected Returns: Understanding Secular Stock Market Cycles. It’s the best we have seen. Bonds have always been a red-headed stepchild in most portfolios. The yields are always too low or sure to go higher. It was only ten years ago that we were told that they have never been this low (then 7% for years) and never, ever have they been 3%. Well, all of this turned out to not be right. Please note the length of each bull and bear market since 1790 in the chart below.

Adapted from ritholtz.com

Looking back to 1981, we remember losing accounts after having been out of the market since 1976 but then buying long bonds at the highest rates in almost 200 years. Why? Short-term rates were at 20%. The answer, of course, is that you cannot get capital gains with short-term treasury bills and you also run a reinvestment risk if rates go down. After looking at the chart, you can see why we believe the bull market in bonds is coming to a close. However, with debt levels where they are and economic conditions in such poor shape, we feel confident the low in the 30-year government yield is still ahead of us.

Central Plains Advisors

Information contained in these commentaries is based upon information obtained from sources both external and internal which we consider to be reliable, but the accuracy of the information and the recommendations contained herein cannot be guaranteed, nor do they constitute a solicitation for the purchase or sale of any securities mentioned herein. Information contained in this commentary may not be reproduced in any form without written permission from Central Plains Advisors.

Disclosures: As benchmarks for comparison, the indexes used represent an unmanaged, passive buy-and-hold approach. The volatility and investment characteristics of the benchmarks cited may differ materially from those of Central Plains Advisors. Please be advised that the comparison to the S&P 500 is not an apples to apples comparison, as they are a different class of assets. The account performance figures reflect the reinvestment of dividends and capital gains. Past performance may not be indicative of future results and does not guarantee positive returns. The performance results for 1991 through 2009 have been independently compiled by CPAs from information provided by Central Plains Advisors. The period of 1991-1999 was one of generally rising stocks and bonds. The period of 2000-2003 was one of generally lower stocks, but rising bonds. The period of 2004-2007 was one of rising stocks and bonds. The year 2008 experienced a stock market crash and average bond market. 2009 experienced a strong stock market and positive bond market. 2010 was a good year for both stocks and bonds. The year 2011 experienced a modest stock market return and quite positive bond market results.