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- The bond market is suffering from "Old Testament capitulation," Jim Bianco told CNBC.
- Bond investors have been "getting their brains beat in, and they can't take it anymore."
- The market veteran also said bonds are in a secular bear market with several more years to go.
The sharp sell-off in bonds will continue, and investors are starting to give up on their earlier bullish bets, market veteran Jim Bianco told CNBC on Tuesday.
According to the president of Bianco Research, the bond market is in a secular bear market that has several more years to go, adding "I don't think we're near the end of this move in the bond market."
That comes as bond yields have soared recently on signs the US economy remains resilient, prompting Fed officials to indicate that more rate hikes are possible.
"I think what you see in the bond market is a capitulation of good old fashioned — I like to say Old Testament capitulation right now," Bianco said. "Basically, most of the year, bond investors, bond managers been long, been trying to argue why we're going to have a recession, why there's going to be a rally. And they've been getting their brains beat in, and they can't take it anymore."
He said a key catalyst in the bond market rout was the Fed's meeting last month, when policymakers held off on a rate hike while suggesting more are possible later.
Rather than continuing to sound uncertain about more increases in the future, the central bank needs to commit to more hawkish policy now, Bianco argued.
"If they're done, and the market senses that there's still some inflation left, they won't touch bonds. And that's what I think has been killing the bond market," he said.
The 10-year rate has surged dramatically to 4.8% this week, hitting its highest level since 2007. Similarly, 5-year and 30-year Treasury yields also reached 16-year highs.
Eventually, Bianco sees the 10-year yield settling in at a new normal of about 4.5%, and equity markets will need to readjust to account for the bond market's growing attraction.
Where the stock market may give investors a 9% average return in the long-term, Bianco said, traders can now gain around two-thirds of that at almost no risk in fixed-income markets.
Apart from the leading seven S&P 500 stocks, it will be more challenging for equities to attract money inflows, he projected.