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 August 8, 2013, 9:57 AM ET

ByPaul Vigna

The bond market’s dominance is coming to an end, and the current moment presents a once-in-a-

generation selling opportunity, a well-known portfolio manager is saying.

“I believe that this will be a generational decline,” James O’Shaughnessy, portfolio manager at

O’Shaughnessy Asset Management and author of the book What Works on Wall Street , wrote in a new

report. O’Shaughnessy crunched the numbers, looking at a series of rolling 40-year returns for the 20-

year U.S. Treasury bond.

“In my lifetime I will never again see returns to the Long Bond as high as those achieved for the 10-, 20-

and 40-years through March 2009,” he wrote. Since reaching an all-time high of 14.82% (imagine that!)

in 1981, the yield on the 20-year bond, as with all bonds, has steadily fallen for three decades. “We

believe that this is a generational opportunity for investors in the 20-year Treasury and other long-

duration bonds.”

Over the past 13 years, bonds have treated investors very well, especially compared to stocks. For example, $100,000invested in the S&P 500 over the past 13 years has had an inflation-adjusted return of 0.14% a year – “turning the

original $100,000 into just $101,970.” The 20-year bond, on the other hand, has returned 5.41% annually, after inflation,

turning the same $100,000 into $203,750. (O’Shaughnessy focused on the 20-year Treasury bond, rather than the more

common 10- or 30-year bonds, because the data set he uses on the 20-year dates back to 1900, he said.)

Bond investors may be patting themselves on the back for that outperformance, but here’s where

complacency can work against them, because “investors tend to extrapolate what their general

experience in markets has been recently well into the future,” O’Shaughnessy wrote.

He was already thinking about a bond selloff in March 2009, he said, but held off on writing about itbecause “quantitative easing was in full swing.” He decided he wanted to wait until the Fed was

preparing to wind down its QE programs. Now that that appears likely, he’s making his call.

“We strongly believe in reversion to the mean in all financial data series,” he wrote. “Be it stocks, bonds,

currencies, or commodities, times of long-term outstanding performance are followed by times of sub-

par performance.” Bonds, he feels, are on the cusp of that reversion.

O’Shaughnessy poured over the data, and found there were several periods of “once in a lifetime” type

returns for bonds compared to stocks. The most stark example, he found, ended on April 30 of this

year: The best 40-year return on 20-year bonds came with the period that ended on April 30, 2013, where they had a

For Bond Investors, a ‘Generational’ Chance to Sell

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cumulative 480% return.

That’s a problem because:

“W hen you look at all rolling 40-year real returns between 1900 and June 2013, you see

that, on average, the 20-year Treasury fails to even double your money—the average

cumulative real gain over all rolling 40-year periods is a mere 94 percent. That means

that the 480 percent cumulative real return was 3½ Standard Deviations above

the long-term average for the bond. This indicates that, over the next 40 years, we can

expect bonds to experience a tremendous amount of mean reversion.” 

O’Shaughnessy has an interesting track record. In March 2009, he advised investors of another generational

opportunity, this one to buy, and to buy stocks. So far, that’s been a pretty good call. In April 1999, he advised investors

to “run, don’t walk, to the exit.” the dot-com boom would gather steam for nearly another year, peaking in March 2000

before it all fell apart.