Bonds are the hottest game in town
EDITOR'S NOTE
Sorry, Beyond Meat. You can't hold a candle to the action in the bond market right now.
Sovereign debt sounds like it should be one of the sleepiest parts of the global financial market. Ho, no. These bonds are acting hotter than the hottest IPOs right now. Remember how the 1998 Fed rate cut sparked the dotcom IPO bubble? Well, now Portugal is the new Pets.com.
Portugal's 10-year yield is about to go negative (it's around 0.16%); Spain is at 0.13%; Ireland's dipped below zero a few days ago for the first time...Germany is just...I have no words. Its 10-year bond yield hit -0.6% today. France's 10-year even hit -0.35%!! And this is why the U.S. 10-year yield has now slumped below 1.6% today. It's clearly eyeing the 2016 record lows of sub-1.4%.
The single most important thing to keep in mind at these head-scratching yield levels is that it's not really about the yields right now--it's about the prices. Falling yields are just the flip side of the coin of rising bond prices. And the prices just keep going up, up, up! So anyone's who been holding German debt this year must feel as jubilant as those who got in TheGlobe.com's IPO in 1999.
All right, I'm not saying German debt has actually gone up 7x in price. But why not grab a quick 8-10% return on holding bunds or U.S. Treasuries? You're supposed to have to risk something for a decent return, and yet these are essentially risk-free.
What about the negative yields? Well, how many people are really likely to hold this debt until maturity? That's what worries me about these extreme gyrations. Everyone starts panicking about the "signal" that woefully low bond yields is sending without realizing there's plenty more to the story.
What would happen if central banks in Japan, Europe, and the U.S. weren't guaranteed buyers of this debt? It's no coincidence today's moves follow three more global central banks cutting rates. Sure, plenty of people in the market think a U.S. and/or global recession is around the corner. But plenty of reasonable people also do not think the U.S. looks that bad.
Even if you do think a U.S. downturn is coming, what's the "right" level for the 10-year? Or does it even matter? We already know central banks will buy more bonds to support the economy--in our case, before it even really needs that support! No wonder there are no sellers in town.
So you can tell me that owning the 10-year at 1.6% makes you sleep better at night than owning "riskier" assets. Let's even put aside the trillion-dollar question of what will happen if and when bonds start showing losses (i.e. rising yields) again. But to me it all smacks of the "greater fool" theory, in that it's not so much intrinsic value that's determining bond levels here. It's knowing there's always going to be someone or some central bank willing to buy at a higher price.
More at 1 p.m.!
Kelly
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