"This is a big, big moment," says Jeff Gundlach of DoubleLine Capital. "I think it's the beginning of something." That something, according to the "bond king", could well be the end of a trend that has lasted since the early 1980s: a bond bull market that has taken prices to record highs.
After an exceptionally calm August, markets have had a jolt. Government bond yields have jumped sharply as prices have slumped (yields and prices move in opposite directions), with the yields on the ten-year US Treasury and German Bund back to their pre-Brexit levels; Japanese bond prices have slid by almost 2.5% this quarter, and are heading for their worst quarterly showing since 2003. All this upheaval in bonds unnerved stockmarkets too. The S&P 500 had its worst day in three months last Friday, losing 2.45%.
The jitters have been ascribed to a lack of support from central banks. The European Central Bank (ECB) declined to extend its quantitative-easing programme, adding to concern that the Bank of Japan (BoJ) could scale back its stimulus measures. To cap it all, a member of the US Federal Reserve suggested that there was a growing risk of the US economy overheating.
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Fears of less central-bank support partly allayed by soothing noises from another Fed policymaker early this week would certainly be a headwind for bonds. But even if this does mark the turning point, yields look unlikely to rise fast. The Fed may opt for a small rate hike, reckons JPMorgan Asset Management's Michael Bell in the FT, but it's hard to see the ECB and the BoJ taking their foot off the accelerator just yet, given that they are still undershooting their inflation targets. This will keep medium- and long-term bond yields at low levels.
Yet this may not just be a question of liquidity-addicted markets having a little tantrum. More and more investors may be taking on board that "monetary policy has reached its limits and therefore the bond rally can't go much further", says Chris Iggo of Axa Investment Managers.
In any case, this week's events are a reminder of how overstretched bond prices are and how investors are unlikely to make money with them. Deutsche Bank proposes two nasty, yet all too realistic, scenarios. The "best realistic" possibility is that higher inflation, caused by higher salaries and helicopter money, slowly nibbles away the real value of bonds. Or bond prices could slump as a country defaults on its debt, which could occur if a country leaves the euro. Either way, Deutsche Bank concludes, we are at a long-term turning point, and bonds are a bad bet.
Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.
After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.
His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.
Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.
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