Futures Now

Bonds are entering a rising rates cycle for the first time since the 1940s, which could be 'worrisome'

Rates are entering a new phase in their cycle: Yamada
Rates are entering a new phase in their cycle: Yamada

Bid farewell to the bond market bull run, because the markets are entering a phase not seen in 72 years: A rising rates cycle.

"The 36-year falling rates cycle, in our opinion, is over," Louise Yamada, managing director of Louise Yamada Technical Research Advisors, told CNBC's "Futures Now" on Thursday.

Since hitting an all-time of 15.84 percent in September 1981, the yield on the U.S. 10-year has been steadily declining. Yields hit lows of 1.36 percent in July 2016. Since then, however, it appears the downtrend has broken, says Yamada.

The next test for yields will be the 3 percent level. At that point, it will have been confirmed technically that the yields have hit a floor, and that a new rising rate cycle is in place, says Yamada.

"We're looking for 3 percent to be crossed and that will, from a long-term perspective, define the initiation of a new rising rate cycle which we haven't seen since 1946," said Yamada.

'A bit more worrisome'

Interest rate cycles are long, typically stretching 22 to 37 years. This new rate cycle could last at least two decades, introducing a whole new class of investors to rising rates.

A move up to 3 percent looks likely as soon as this quarter, says Yamada, especially as expectations rise that the Federal Reserve will be aggressive about containing inflation.

At least three increases to the federal funds rate are expected in 2018, the first of which could come as soon as the Fed's next meeting in March. The chances of a 25-basis-point rate hike in March sit at around 83 percent, according to CME Group fed funds futures.

The likelihood of higher interest rates this year has grown as rising prices return to the economy, and the benefits of tax cuts feed into the system. Consumer and producer prices both jumped in January.

For investors worried that a rising rate cycle will put a snag in the equity bull run, Yamada has good news: Markets can still rise along with an uptrend in interest rates… up to a point.

"You can see rates go up to a certain extent along with a growing economy. They can go in tandem for a while," she said. "It's really not until rates get somewhere over 5 percent that things become a little bit more worrisome."

Lst week, the yield on the 10-year Treasury note hit a four-year high of 2.944 percent. Yields retreated below 2.9 percent again on Friday. The 10-year last traded above 3 percent on Jan. 9 2014.

This is the next line in the sand for rates: Yamada
This is the next line in the sand for rates: Yamada