Here’s where Credit Suisse sees the risk of a bear market for bonds

Key Points
  • A major trigger of last week's market sell-off was the steady but unrelenting climb in U.S. Treasury yields.
  • Credit Suisse's Global Head of Technical Analysis believes the surpassing of 3.05 percent on the 10-year U.S. Treasury yield could signal a bond bear market.
  • Many experts hold that no specific level necessarily means a bear market, and that judgement is subjective.
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A major trigger of last week's market sell-off was the steady but unrelenting climb in U.S. Treasury yields, which sparked fears of higher borrowing costs, impending interest rate rises and generally bad news for most equity traders.

But the bond bear market is not yet upon us, says Credit Suisse's Global Head of Technical Analysis David Sneddon, who believes the tipping point could be when the 10-year U.S. Treasury yield surpasses 3.05 percent.

Despite earlier calls by bond titans Bill Gross and Jeffrey Gundlach — in January, Gross said a bond bear market was confirmed after long-term trendlines were broken, while Gundlach issued warnings about the 10-year Treasury yield hitting 2.63 percent — many experts argue the incipient sell-off has yet to go into full-on bear mode. At time of reporting, the 10-year yield stood at 2.83 percent.

But as the yields continue to climb, with central banks moving away from bond buying — reversing a nearly three-decade trend of falling yields — the tipping point appears to be continuously moved higher.

Until recently, bond yields had been falling for decades. The average yield on a 10-year Treasury bond in 1981, for example, was higher than 15 percent. This change in course has spurred debate over when, if not now, the bear market for bonds will take hold.

"Just starting with the 10-year Treasury in the U.S., we've seen a significant break this year," Sneddon said. "If we look at a long-term chart going back to the 1980s, we've essentially broken that secular downtrend. That is huge. That big secular downtrend in yields is over.

"In our view, that indicates a more bearish tone — the market reaction to that has been compelling, we've seen yields rise sharply on that move. The big question now is: just because you break a secular downtrend, does that automatically mean you begin a secular bear market?"

Not necessarily, according to recent history — yields hit these levels in 2014 and did not trigger a massive sell-off. Sneddon provided that equities could still hold in the event that the downtrend in yields simply turns into a "sideways trend" — in that case, he said, "I think that's fine for equity markets and we hold in." Higher yields are typically bad for equities as they raise companies' borrowing costs.

US 10-year yields have broken secular down trend: Credit Suisse

"But if that breaks, that for us is very significant on a medium-term basis," Sneddon warned. He said this is because it would suggest that real yields — nominal yields adjusted for inflation — are going to rise more significantly. This would indicate higher inflation and a likely faster path of Federal Reserve interest rate rises.

But these developments will have to be fairly aggressive to signify a real risk, Sneddon said. "It's not just a minor blip that we need to go through these levels, we need to see a clear and conclusive break ... through 3.05 in the 10-year Treasury."

"What we're trying to flag up to investors is how important it would be if these levels break and the risks that that would then pose."

'A matter of personal opinion'

Not everyone sees a clear demarcation for entry into bear bond territory. Some, like Brian Jacobsen, chief portfolio strategist at Wells Fargo, consider it more a matter of personal opinion, noting that inflationary pressures and rising interest rates will be central concerns in the coming months.

"The key question is whether your coupon income (the yearly return on a bond) can offset inflation and price declines," Jacobsen told CNBC. "With yields where they are now, at least you can beat inflation, but it's going to be tough to beat any price declines from further rises in yields."

Similarly, strategists at UBS shrugged off the focus on a particular number.

"There's no specific level that's going to mean a bear market," Mark Haefele, global chief investment officer at UBS Wealth Management, told CNBC.

While higher yields are not helpful for equities, as long as higher borrowing costs don't harm economic and earnings growth, surpassing 3 percent shouldn't mean a bear market, Haefele said. "Much higher levels, i.e. 3.5 to 4 percent, could prove more disruptive, however, as this would start to make equities look relatively less attractive."

"If we see much more sustained signs of higher inflation and tighter policy then you might have enough to drive a bear market in bonds," he added.