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Greatest Asset Class Bull Market Ever May End This Year

The 30-year bull market in longer-term government bonds - the greatest and most consistent in investment history - is ending, investors said, as higher inflation, bigger deficits, and a rotation of assets kick in this decade.

“While it probably doesn’t get the recognition it deserves, the 10-year U.S. government note probably holds the record for the longest asset price bull market of the post-World War II era,” said Nicholas Colas, Chief Market Strategist for BNY ConvergEx Group. “The Fed spent 30 years fighting inflation and rates went down. Now they want to create inflation and rates should rise.”

After Former Federal Reserve Chairman Paul Volker raised interest rates in the early 1980s to break the back of double-digit inflation arising out of the troublesome 1970s, long-dated Treasury rates went from more than 14 percent to just 3.4 percent today. In turn, as is the nature of fixed income, bond prices have steadily increased as rates decreased.

Long-term government bonds provided a total return of 13 percent in the 1980s, 9 percent in the 1990s, and eight percent from 2000 to 2009, according to data from PNC and Ibbotson Associates. And the asset class returned 20 percent last year alone.

“If there is any reversion in inflation toward the long-term rate of almost three percent, there is precious little margin for error at these levels,” wrote PNC’s Chief Investment Strategist William Stone in his outlook for the New Year. “The current 10-year trailing returns of stocks relative to bonds and cash remain at relatively extreme levels on the downside. Any return to more normal levels would portend positive relative returns for stocks.”

Minutes from the Federal Reserve’s latest meeting released Wednesday showed that policymakers plan to stay the course on buying $600 billion in long-term Treasurys in order to keep interest rates essentially in negative territory. On the surface, one would think this would be bullish for bonds, and it was for most of last year. But in the fourth quarter, investors went from anticipating this quantitative easing program to betting on higher growth and inflation when the Fed bond buying actually began.

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Rose | Mueller | Stock4B | Getty Images

“The great bull market in bonds has ended,” said Dennis Gartman of The Gartman Letter, standard morning reading on every Wall Street trading floor. “We are in for thirty years of rising rates. That’s the bond market’s history: 25-30 years of tidal rate movements.”

Treasury Secretary Timothy Geithner sent a letter to Congress today saying that the national debt could hit its legal limit at the end of the first quarter. Congress likely will be forced to vote before then on raising the debt ceiling, which is currently a little more than $14 trillion. The government must continue to issue more debt to pay for economic stimulus and tax cut extensions enacted to climb out of the recession.

“It’s supply and demand,” said Karen Finerman, president of hedge fund Metropolitan Capital and a ‘Fast Money’ trader. “How can it be a bull market in Treasuries when the supply is gigantic?”

These investors are not alone. During the second week of December, banks sold $12 billion of Treasury and Agency debt even as they took in deposits of three times that amount, points out Morgan Stanley.

“Mutual funds, banks or other holders of U.S. debt have one thing in common, they own too many bonds at too low of an interest rate that may not square with their projections for economic recovery and inflations risks in 2011,” wrote Jim Caron, the firm’s global head of interest rate strategy, in a note this week. “Reducing exposure to bonds may be a key theme as we start the New Year.”

To be sure, PNC advised clients to not abandon bonds altogether, as the asset class still gives investors predictable income generation over time. Still, the writing seems to be on the wall for one of the most storied runs in Wall Street history.

“The only asset that might have given the 10-year a run for its money was U.S. owner occupied residential real estate prior to 2007,” said BNY’s Colas. “So much for that.”

* For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On January 6, 2010, following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Scaramucci and Skybridge Capital Own (AAPL); Scaramucci and Skybridge Capital Own (BAC); Scaramucci and Skybridge Capital Own (C); Scaramucci and Skybridge Capital Own (DELL); Scaramucci and Skybridge Capital Own (GS); Scaramucci and Skybridge Capital Own (JPM); Scaramucci and Skybridge Capital Own (MON); Scaramucci and Skybridge Capital Own (ARO); Weiss owns (UUP); Weiss owns (TBT); Weiss owns (VZ); Weiss owns (QCOM); Weiss owns (HPQ); Weiss owns (MEE); Weiss is short (GDX); Weiss is short (TCK); Terranova owns (GM); Terranova owns (C); Terranova owns (VRTS); Terranova owns (UPL); Terranova owns (PEP); Terranova owns (OXY); Terranova owns (GS); Terranova owns (LTD); Terranova owns (GLD) puts; Terranova owns (SLV) puts; Terranova owns (FCX) puts; Finerman's firm is short (IJR); Finerman's firm is short (MDY); Finerman's firm is short (SPY); Finerman's firm is short (IWM); Finerman's firm is short (XRT); Finerman's firm is long S&P puts; Finerman's firm is long Russell 2000 puts; Finerman owns (AAPL); Finerman owns (BAC); Finerman's firm owns (BBY); Finerman owns (BP); Finerman's firm owns (BP); Finerman's firm owns (GLW); Finerman's owns (GOOG); Finerman owns (HPQ); Finerman's firm owns (HPQ); Finerman's firm owns (IBM); Finerman owns (JPM) and (JPM) leaps; Finerman's firm owns (JPM) and (JPM) leaps; Finerman owns (MSFT); Finerman's firm owns (MSFT); Finerman's firm owns (WMT); Finerman's firm owns (PLCE)

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