To hear former PIMCO Bond King Bill Gross tell it, bonds have reversed a 35-year bullish trend and have now entered a bear market. This massive bear will purportedly last many years and wipe out tens of trillions of investor capital in the process.

The trigger to Mr. Gross’s assertions is the 2.6% level on the yield of the U.S. 10-Year T-Note. This is the line in the sand that separates bull from bear and good times from bad for bondholders.

So, with the 10-Year first moving to and then above the 2.6% level in front of last week’s meeting of Janet Yellen and her merry band of central bankers, one might have expected the bond market to be downright u-g-l-y by now. After all, Yellen did raise interest rates a couple months ahead of expectations, talked about how well the economy was doing, and noted that inflation will soon be at or above the FOMC’s target.

To the investing public, this probably sounds like a recipe for disaster in the bond market. A stronger economy, rising inflation, and the Fed hiking rates would appear to be a triple threat for bond prices to fall. And with yields having nearly doubled since last summer’s all-time low (yes, the 1.367% closing yield seen on July 5, 2016 was an ALL-TIME low), Mr. Gross’s call for a downhill slide in bond prices would seem to make sense.

A Funny Thing Happened on the Way to the Debacle

But a funny thing happened on the way to the bond debacle last week. Instead of yields shooting higher after breaking through the 2.6% line in the sand (the yield on the 10-year closed at 2.615% on March 13) in front of the Fed meeting, yields have actually pulled back from the moment Ms. Yellen stepped to the microphone. In fact, the 10-Year closed yesterday at 2.493%, which is below the “psychologically important” 2.5% level.

10-Year T-Note Yield – Daily 

How can this be, you ask? How can bond prices be rising when the perfect storm is obviously on the horizon? Didn’t Yellen say that the rate hikes were going to continue for the next 2+ years? Isn’t this what the bond bears have been calling for? What is going on here?