'Biggest bond bubble in history' is about to burst Cantillon: Hedge fund manager Paul Singer says turnaround likely to be “surprising, sudden, intense, and large” about 21 hours ago Updated: about 18 hours ago
Paul Singer, founder and president of Elliott Management: “Hold such instruments at your own risk; danger of serious injury or death to your capital!”. Photographer: Jacob Kepler/Bloomberg
“The market can remain irrational longer than you can remain solvent,” is a famous quote, often attributed to JM Keynes. And indeed we have experience in Ireland of how a market – in our case the housing market – can remain irrational for a long period of time. The “ fundamentals” were supporting it, was the argument. And how wrong it was. Now we have the same argument being used to support the super-low and even negative yields in bond markets, especially those for Government debt. Some $13,000 billion of bonds worldwide are now trading at negative interest rates, including short-term Irish Government debt. But with central banks pumping billions into the world economy (often by buying bonds), growth remaining at record lows and official interest rates on the floor, we are told, yet again, that the fundamentals are supporting all this.
Looks like a duck Perhaps they are. But the lesson of our housing market reflects the theory about something that looks like a duck and quacks like a duck. And so enter Paul Singer of Elliot Management, who should know something given that his hedge fund manages $28 billion in assets. He told investors in a letter this week that, in his view, the turnaround in the bond market was likely to be “surprising, sudden, intense, and large”. He said he believed we were in “the biggest bond bubble in world history”, and advised investors to avoid sub-zero yielding debt. “Hold such instruments at your own risk; danger of serious injury or death to your capital!” he wrote, according to CNBC. Of course such warnings have been made for the last couple of years and, despite them, bond prices have continued higher and yields – or interest rates – have continued to decline. It is hard to know what might burst the bubble, with little sign of a big take-off in growth or inflation. But common sense would suggest that investors paying governments to lend them money to cover their budget deficits really doesn’t make a lot of sense. As Singer said, it could all end with a bang. But when, and why, is the really hard question to answer.
Pension freezes for one. Pension funds, and banks and insurance companies, are required by law to hold bonds to offset their liabilities.
In the good ole days of 5 percent IR, they can rely on bond interest rates to pay their pensioner income streams.
Now that bonds are yielding negative, they will have no choice but to freeze payments if they can't find higher yielding assets. All assets are expensive at the moment and yields are shit. Asset managers are being forced to buy junk bonds or invest in the highly inflated stock market for yield.
I don't even want to contemplate what will happen to banks. Maybe deposit bail ins.
Pension freezes for one. Pension funds, and banks and insurance companies, are required by law to hold bonds to offset their liabilities.
Look at what has happened to UK company pensions over the last 10 years. Nobody offers final salary schemes anymore. They were a Ponzi which required exponentially more people to be paying in than were taking out.
My father retired early 14 years ago and he gets 3/4 of his final years salary, index linked for life. I think it cost him something like a tenner a week to be a member.
When these funds were shutdown to new members, money purchase schemes came into effect. A big chunk of this money goes straight into bonds as a "safe asset".
This creates a captive market for government debt. But if government debt is to rise exponentially, buyers of government debt need to earn exponentially more and this is not happening.
The answer?
QE? Helicopter money?
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Government bonds in fiat issuing countries simply reflect investor expectation of the cumulative cash rate which is set by the CB. That is, if investors believe the average CB cash rate for the next ten years is 2% (time adjusted), then that is where the 10-Y bond rate will settle.*
So the only way “the bond bubble will burst” (if that is what it is), will be because investors expect a sharp increase in the cash rate in response to inflation or some other event. That is, CB’s will have to create the bust. Hard to see in the current environment - especially since negative interest rates and QE are deflationary as discussed here in 2012. http://australianpropertyforum.com/single/?p=8346091&t=9728075
I wouldn’t expect a bond crash (i.e.: yields above 6-7% for a sovereign currency issuer) any time soon.
* Note: Bond yields are anchored to the cash rate since they are essentially interchangeable with reserves / cash at maturity. This means the bond yield is really an indifference point to holding cash for the same term. For more the following link may be useful as it relates to Australia. http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html
Government bonds in fiat issuing countries simply reflect investor expectation of the cumulative cash rate which is set by the CB. That is, if investors believe the average CB cash rate for the next ten years is 2% (time adjusted), then that is where the 10-Y bond rate will settle.*
So the only way “the bond bubble will burst” (if that is what it is), will be because investors expect a sharp increase in the cash rate in response to inflation or some other event. That is, CB’s will have to create the bust. Hard to see in the current environment - especially since negative interest rates and QE are deflationary as discussed here in 2012. http://australianpropertyforum.com/single/?p=8346091&t=9728075
I wouldn’t expect a bond crash (i.e.: yields above 6-7% for a sovereign currency issuer) any time soon.
* Note: Bond yields are anchored to the cash rate since they are essentially interchangeable with reserves / cash at maturity. This means the bond yield is really an indifference point to holding cash for the same term. For more the following link may be useful as it relates to Australia. http://www.rba.gov.au/mkt-operations/resources/tech-notes/eligible-securities.html
Well, no.
Pensions and insurance companies and most especially banks have to mark-to-market the values of the bonds in their balance sheets.
Pretty funny things these bonds. They are backed by the full confidence of governments being able to point the military's machine guns on it's citizens to cough up the tax. Hence, the safest asset class in existence. Hence, the asset class behind banks' balance sheets. These bonds underpin the money in your deposit.
Problem is, these bonds are also traded on secondary markets. They appreciate in value when yields go low and depreciate when yields shoot up.
Your 10 year projection is just that: a projection. And if bonds and cash are interchangeable at zero and negative, why not just store cash instead of buying the bond?
That's exactly what some banks and insurance companies are doing or contemplating. Not to mention Japanese housewives.
Commerzbank and Munich Re in Germany have already considered stashing physical cash. The cost of maintaining their own security and vault, like in the old days of banking, should be the same or lower than the negative rate they have to pay governments.
Same goes for Japanese housewives. Why risk currency fluctuations buying treasuries or gilts when you can stash the cash in the home safe?
The thing about selling bonds is it just triggers more selling. When hive panic selling by hedge funds and Japanese housewives take over, your bank and pension fund and insurance company still has to keep those depreciated bonds in their books.
Now mark to market those cheap bonds and they may run into solvency issues.
And speaking of stashing millions, would you rather stash a million in bills or the equivalent bullion?
Matthew, 30 Jan 2016, 09:21 AM Your simplistic view is so flawed it is not worth debating. The current oversupply will be swallowed in 12 months. By the time dumb shits like you realise this prices will already be rising.
Pensions and insurance companies and most especially banks have to mark-to-market the values of the bonds in their balance sheets.
Pretty funny things these bonds. They are backed by the full confidence of governments being able to point the military's machine guns on it's citizens to cough up the tax. Hence, the safest asset class in existence. Hence, the asset class behind banks' balance sheets. These bonds underpin the money in your deposit.
Problem is, these bonds are also traded on secondary markets. They appreciate in value when yields go low and depreciate when yields shoot up.
Your 10 year projection is just that: a projection. And if bonds and cash are interchangeable at zero and negative, why not just store cash instead of buying the bond?
That's exactly what some banks and insurance companies are doing or contemplating. Not to mention Japanese housewives.
Commerzbank and Munich Re in Germany have already considered stashing physical cash. The cost of maintaining their own security and vault, like in the old days of banking, should be the same or lower than the negative rate they have to pay governments.
Same goes for Japanese housewives. Why risk currency fluctuations buying treasuries or gilts when you can stash the cash in the home safe?
The thing about selling bonds is it just triggers more selling. When hive panic selling by hedge funds and Japanese housewives take over, your bank and pension fund and insurance company still has to keep those depreciated bonds in their books.
Now mark to market those cheap bonds and they may run into solvency issues.
And speaking of stashing millions, would you rather stash a million in bills or the equivalent bullion?
Banks can not “stash cash” in size.
Bank reserves are fixed (outside of CB operations). They are used to settle transactions on behalf of customers. So they are stuck with them. And the problem with QE it is gives the banks even more cash!
Hence why Banks are buying bonds with a negative yield - the alternative is to hold cash with a larger negative yield. And that is setting the price.
Apart from that, I’m not sure what part of my first post you actually disagreed with?
I read that. It sounds worrying. What do you think the implications are?
Implications ??? Who really knows with so much debt.
What the article does show is very concerning. $13,000 billion in bonds getting negative returns shows us the world is slowly going broke. Even if the bond market was not to collapse (which it will anyway), it shows these negative returns means investors are now having to chew into their capital for living expenses instead of rely on the return, which before would cover living expenses and possibly then some. Not any more. As a result, people slow down on spending and buisiness and jobs are put under further pressure. With rates near zero, there is little if any relief from here on, thats it, forever in rate relief, we finally hit zero. Only one way they can go from there, and in a big way, just like 1987 when they were forced up.
So its looking very bad either way. These are the only two scenarios left.
1) A slow melt if they can somehow prevent collapse.
2) A fast melt and little way forward if they cannot.
'Biggest bond bubble in history' is about to burst Cantillon: Hedge fund manager Paul Singer says turnaround likely to be “surprising, sudden, intense, and large” about 21 hours ago Updated: about 18 hours ago
Paul Singer, founder and president of Elliott Management: “Hold such instruments at your own risk; danger of serious injury or death to your capital!”. Photographer: Jacob Kepler/Bloomberg
“The market can remain irrational longer than you can remain solvent,” is a famous quote, often attributed to JM Keynes. And indeed we have experience in Ireland of how a market – in our case the housing market – can remain irrational for a long period of time. The “ fundamentals” were supporting it, was the argument. And how wrong it was. Now we have the same argument being used to support the super-low and even negative yields in bond markets, especially those for Government debt. Some $13,000 billion of bonds worldwide are now trading at negative interest rates, including short-term Irish Government debt. But with central banks pumping billions into the world economy (often by buying bonds), growth remaining at record lows and official interest rates on the floor, we are told, yet again, that the fundamentals are supporting all this.
Looks like a duck Perhaps they are. But the lesson of our housing market reflects the theory about something that looks like a duck and quacks like a duck. And so enter Paul Singer of Elliot Management, who should know something given that his hedge fund manages $28 billion in assets. He told investors in a letter this week that, in his view, the turnaround in the bond market was likely to be “surprising, sudden, intense, and large”. He said he believed we were in “the biggest bond bubble in world history”, and advised investors to avoid sub-zero yielding debt. “Hold such instruments at your own risk; danger of serious injury or death to your capital!” he wrote, according to CNBC. Of course such warnings have been made for the last couple of years and, despite them, bond prices have continued higher and yields – or interest rates – have continued to decline. It is hard to know what might burst the bubble, with little sign of a big take-off in growth or inflation. But common sense would suggest that investors paying governments to lend them money to cover their budget deficits really doesn’t make a lot of sense. As Singer said, it could all end with a bang. But when, and why, is the really hard question to answer.
It's the compression Foxbat spoke about, if, and i say if it happens, debt will be something you just do not want to have.
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