When will government bond markets implode?

Hope you had a happy Halloween!

This weekend I read Conservative MP Doug Carswell’s, The End Of Politics.

I recommend it. It will fill you with optimism.

Carswell describes how the shrinking of the state is inevitable. The collective intelligence generated by the digital age means it will just not be possible for states to operate in the opaque, suffocating and expensive way that they do.

The tax receipts will no longer be there. The possibility of endless government borrowing will not be there. And the option to inflate the currency will not be there as, thanks to digital alternatives, governments will lose their monopolies on money.

So the state must shrink or die.

If he’s right – and I hope he is – the world will be a better place for it.

But I fear we’ve a long way to go before we reach any such golden age. And in the meantime investors need to be prepared for a painful transition.

Welcome to the Great Stagnation

Nobody can say for sure what would have happened if governments and central banks had acted differently in 2008. What if the banks had not been bailed out? And what if central banks had not chosen massive economic and financial intervention?

I like to think that asset prices would have fallen considerably lower, that a free-er and fairer system of money and finance would have emerged and that economies would now be growing in a much healthier way. But neither I, nor anybody else, can prove what might have been.

Now a feeling of stagnation and limbo pervades. Politics is mired in debates over whether stimulus and spending or cutbacks are the answer. Businesses are reluctant to borrow and invest. Banks are reluctant to lend. The housing market has atrophied. Stocks are neither compellingly expensive, nor compelling cheap, stuck in a cycle of panic followed by stimulus. And investment decisions are being made often not on the merits or otherwise of a company, but on how inflationary the actions of a central banker are anticipated to be.

In the late 1970s and early ’80s, governments were forced to take certain measures because they had lost control of currencies, interest rates were spiralling and the bond vigilantes were forcing them down a certain path. But that is not the case now. The bond markets are still in bull mode.

We won’t see Carswell’s “end of politics” – or the Great Purging that was avoided in 2008 – until we get a reversal in bonds. The big question is, when, if ever, will we get that turn?

Have bond markets peaked?

In the UK, the Bank of England is now buying 50% of UK gilts – and, effectively, printing the money to do so. It’s an artificial situation, but that doesn’t mean it can’t carry on. I’ve called the top in bonds before and been wrong. Look at Japan if you want to get an idea of how long these things can go on for – 23 years and counting since the crash of 1989. Gilts are perceived as a safe haven, even real inflation is higher than the yield they pay.

Here’s a chart of UK interest rates since the 1970s. They continue to be the lowest they’ve been in history.

UK interest rate chart

And here, thanks to Nick Laird of sharelynx.com we see ten-year yields. I must say I am surprised to see that they are not quite at all-time lows.

UK ten-year bond yield chart

The longer this artificial stimulus carries on, I’d say the more inflation is being stored up for further down the road. Once rates do start to rise, the chances are prices will run far ahead of them.

Turning now to the US, we see the yields on ten-year Treasuries are even lower.

US ten-year bond yield chart

Next we see a chart of the 30-year bond price.

US 30-year bond yield chart

This is a bull market that began in 1982. It’s extremely orderly and well behaved – as you can see by the two blue tram lines. Using a dotted red line I have also marked the 377-week exponential moving average (the average price of the last 377 weeks, exponential meaning recent weeks carry more weight ). A 377-week average might seem an odd average to use, but it works beautifully, as you can see. Every few years it comes back there to find long-term support.

The next move for bond prices

The current bond price of 148 is less than 5% off the all-time high of 153 which came earlier this year. We are trading near the top of a well-defined range and I see a return to the 123-5 area as a distinct possibility (see the green circle on the graph) over the next year or so.

But, in such an event, that structure I have drawn would still be intact, even though such a move would add pressure. While that structure remains, it’ll be business as usual. Limbo continues.

But the game changes, in my view, if we sink below those levels, below that lower rising blue line. That’s when rates start to rise, debt becomes much harder to service, defaults increase, governments lose control, perhaps they print more, raise taxes even further – and we head into Carswell’s “end of politics”.

If you want to play bond prices, most spread-betting firms offer bets and CFDs that track them. You can also buy government bonds although this is a route best suited to experienced investors. Besides I don’t tend to buy bonds directly as I don’t like the way the government spends my money! 

Of course, if we do ever get bond market mayhem and Carswell’s “end of politics”, gold will be very much the place to be. Perhaps that’s when we see its much touted final blow-off phase. After that the green shoots of economic – or Kondratieff spring – will come through.

Finally, I would like to thank all of you who have pre-ordered my book: Life after the state. Last week, I’m delighted to say, we got it fully funded. I am very grateful and very excited. As you can imagine, being called Life After The State, it covers a lot of similar ground to Carswell’s End Of Politics which now means I now have to get my head down and do some heavy re-writing, before the book heads into pre-production and printing.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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  • Chris

    I enjoy your emails. Think your chart on 10 year yield needs updating though – they have been below 2% for a while now which, I believe, is record low. Chart from sharelynx shows just under 4%

  • Jim C

    I haven’t read Carswell’s book… but I think he’s got it wrong, at least in the short to medium term.

    I agree that the government won’t be able to directly tax us much more; but the statement “And the option to inflate the currency will not be there as, thanks to digital alternatives, governments will lose their monopolies on money” seems to me to ignore the simple fact that, as long as the government has the monopoly on coercion (the very definition of government) it can compel people to accept its currency, because if you can’t pay your tax in it, they’ll throw you in a cage.

  • Jim C

    …And so the government will be able to keep ‘borrowing’ – it’ll just do it through more and more BoE monetisation. The electorate are simply too ignorant not to realise that the free lunches they continue to vote for are being picked from their own pockets via inflation; until we have a hyper-inflationary episode to wake everyone up, I can’t see them paying enough attention to the matter to realise what’s going on.

  • Chester

    If central bankers had not “saved the world”, we would look like Iceland. It is growing sustainably having allowed bad debt to collapse, banks to go under, and by underwriting the savings of Icelanders so that blood would not run in the streets

    They are also a better risk than any other western govt today – the baggage is gone. The pain was quick. What we have created elsewhere is stagnation by denial, thinking default can be avoided. It cannot and will not be. Govts are already defaulting by stealth through central bank sponsored inflation, or directly defaulting on welfare promises etc. The longer the denial, the harder the correction, which is unavoidable

  • igiveup

    I agree with 4.Chester – central bankers are the problem. I was amazed to hear on Radio 4 Today programme this morning, David Miles (MPC member) stating that ‘without QE the recession would have been deeper and longer” – how dumb can you get. Yes the recession would have been deeper but it would have been shorter! By allowing a proper correction to occur, asset prices would have dropped significantly more, zombie banks would have been euthanased and we’d now be on a growth path like Iceland. Pretending that the debts can be repaid when they can’t will just lead to ongoing stagnation.

  • Jim C

    4 & 5, yes, I agree, central bankers are the immediate problem – but ultimately, the problem lies with the populace who are insufficiently engaged with monetary economics to hold their “representatives'” feet to the fire.

    In the mainstream press it’s considered ‘conspiracy theory’ to suggest that our finance ‘industries’ have hijacked our polities; but even a cursory glance at what’s been going on reveals that’s exactly what’s happened.

    Voters are astonishingly credulous when it comes to pronouncements from the ‘authorities’. ‘Central banks saved the world?’ No they saved the banks – at our expense.


    The tyranny of taxation is what all governments have in common. The abolition of taxes would mean the end of the state. This can never happen.

  • Orb

    I have to agree with 4, 5 & 6: the Iceland route would have served the greater good. Since when did ordinary British folk ever hold the reigns? They are firmly in the hands of the greedy few. And many of you will know how incredibly difficult it is to write off a costly mistake that initially seemed a guaranteed profit!

    “I don’t tend to buy bonds directly as I don’t like the way the government spends my money!” – exactly the reason I go to great lengths to avoid paying tax! (London dome? Countless ‘artworks’ around towns, cities and roundabouts while infrastructure crumbles? Interest payments on the national debt? Grants to a country with its own space program?.. the list is ENDLESS!!) I can’t believe Jimmy Carr and others didn’t capitalise on this.

    How did CPI compare to wage growth in the decade leading up to 2008? Boris, do you have some figures? I think we are due a good dose of inflation – the party went on too long.

  • Democritus

    Governments have a monopoly on taxation, not money creation. Money is loaned into existence. That is a monopoly of the banks.

    Banks love taxation because obedient Governments use it to build up bloated state sectors whose employees and institutions gobble up debt. Meanwhile, the banks expertly avoid paying their putative share of the tax bill.

  • JREwing

    The US bond market will be the last to fall. Not just because of the fact that the US controls the reserve currency but also with all the added energy production from shale oil and gas, there will be a lot of new valuable production to support additional borrowing (though not enough to stave off an eventual collapse).

    The Euro will go first, then the Yen, then Sterling and then the Dollar (the last may not happen for another 10 years).

  • PJ

    Sounds like Iceland is a good place to invest. What’s the best way to do this?

  • Jo

    Just like to support the comments above . If your knowledge did go mainstream then maybe we could be like Iceland. Will the elasticity of our patience ever pop?

    Your comments have given me hope!

  • nick

    Why the obsession with gold? There’s not enough of it and it takes too much work to verify its purity to be genuinely liquid. If you’re going to swap gold IOUs instead of the real thing (to keep it in the certification loop) you may as well swap the IOUs issued by the Bank of England. These days it’s a commodity only and should be treated as such.

    It’s not only Carswell who thinks the internet age will change the world, it’s a recurring theme in economics at the moment. Information distribution will never be perfect but the internet will increase the general level of education and make it a lot better than it it ever has been. This will (hopefully) reign in some of the less equitable government spending (ie corruption and cronyism) which will in itself lead to a shrinkage in government.

    Might take a generation or so to filter up to the top though,

  • Colin Selig-Smith

    I suspect the worm has already turned.

    Central banks have to monetise their state’s enormous debts. If they allow interest rates to rise the deficits simply rise and make the problem worse. It looks to me like bonds have already turned down. The people who understand that interest rates are going to be held down no matter the true level of inflation are already starting to jump ship.

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  • Aff

    The state must shrink or die

    What a lovely thought! :) The future is golden

  • niko

    10 year government bond yealds could fall to very NEGATIVE .Possibly up to -10% or even more and that means higher equity higher bond prices and higher property prices , the perfect combination for a mega recovery and next bubbles.