Wharton’s Jeremy Siegel recently declared the end to the 40-year bond bull market.

“History has shown that somewhere this liquidity has to come out, and we’re not going to get a free lunch out of this. I think ultimately, it’s going to be the bond holder that’s going to suffer. That’s certainly not the popular notion right now.” – J. Siegel via CNBC

Such has been the same message from bond bears since the “Financial Crisis.” Yet, during the entirety of the past decade, rates have consistently headed lower.

bond bull market, #MacroView: Why Siegel Is Wrong About End Of Bond Bull Market

The reasons have been clear, and since June of 2013, I have been pushing back against calls for higher rates from the likes of Bill Gross and Jeffrey Gundlach. While there have certainly been upticks in rates, as nothing travels in a straight line, the long-term trend remains lower.

Economic Growth Drives Rates

As noted by Jeremy Siegel, the primary argument for why rates must go up, is because rates are low.

“Forty years of a bull market in bonds. It’s really hard to turn your head around, and say could this be a turning point? But I think history will say yes. I see rates rising continuously over the next several years.”

The problem, however, is that interest rates are vastly different than equities. When people go to make a purchase on credit, borrow money for a house, or get a loan for a new car, they “buy payments.” What ultimately drives the purchase decision is “how much will this cost me?”

The determining factor in the purchase decision is the interest rate effect on the loan payment. If interest rates rise too much, consumption stalls. As consumption makes up 70% of GDP, one should not ignore the relationship between rates and consumption. As noted previously:

“There is a precise correlation between PCE and GDP. Not surprisingly, if consumption contracts due to high levels of unemployment, then economic growth declines.”

bond bull market, #MacroView: Why Siegel Is Wrong About End Of Bond Bull Market