Shocking bond stats
EDITOR'S NOTE
Some people collect coins, or stamps. I've been collecting shocking bond market stats.
If there's one takeaway from all this, to me it's that bonds have gotten way out of whack with even the fundamental underlying question of when and whether we're heading into recession or not. Let's recall, where was the 10-year Treasury yield when the Great Recession started in December 2007? Around 4%.
So either this is a temporary, cyclical aberration that must somehow get corrected (remember when people would say that home prices in the U.S. had never fallen?), or global bond markets are structurally--and maybe permanently--broken*. Neither prospect sounds great to me.
> The U.S. 30-year bond is yielding less than the S&P 500's dividend yield. The last (and apparently only other) time that happened was in 2009--as the Great Recession was ending, not before it got started. The 30-year also hit a record low overnight of just over 1.9%.
> The German 10-year bond yield hit a record -0.73% overnight. The French 10-year hit -0.45%. Even famously fiscally unfit Italy went below positive 1% (I had to write "positive"!) for the first time.
> How strong is the price action in bonds (the flip-side of sinking yields)? August will be just the 19th month since 1987 that long-term Treasuries beat the S&P 500 by more than ten--ten!--percentage points.
> If the yield on Swiss government debt rose by two percentage points, it would amount to a 50% loss for bondholders, per Jim Bianco. If the yield on Germany's 30-year bonds hit 1%, the price of its zero-coupon bond (its first ever) issued last week would fall 29%, per Second Curve's Tom Brown.
> Of all investment-grade debt globally that offers any yield, 95% is from the U.S. right now, according to BofA Merrill. No wonder our yields are dropping. "There is a wall of new money being forced into the global corporate bond market," says BAML's Hans Mikkelsen. That's where you go when sovereigns are this negative.
And there's plenty more: Denmark's offering negative-yielding mortgages, Germany is toying with banning negative deposit rates on bank accounts....And speaking of that wall of money, check out the chart below, also via Tom Brown. That's $2 trillion of bond inflows over the past decade, while money has on net flowed out of the stock market during pretty much its whole bullish run.
Tell me this isn't the world's most crowded trade...
See you at 1 p.m.!
Kelly
* I don't buy the "negative time preference of money" argument, and if it's all long-term demographics, then why was the U.S. 10-year at 3.25% just a few months ago?
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