The fresh madness in the bond markets

Plunging bond yields are sending an unambiguous distress call as investors fret about everything from a weaker global economy and the trade war to Middle Eastern geopolitics and low inflation.

Reading financial markets is sometimes as frustrating as trying to divine the future from tea leaves, writes Eshe Nelson in Quartz. Not this time. Plunging bond yields are sending an unambiguous distress call as investors fret about everything from a weaker global economy and the trade war to Middle Eastern geopolitics and low inflation.

The amount of negative-yielding corporate and government debt surpassed $13trn last week, a new record, eclipsing the previous high of in mid-2016. Many market commentators predicted then that a secular bull market in bonds that started in 1982 had run its course. Yet negative yields are back with a vengeance. John Ainger on Bloomberg notes that Germany's entire $850bn bond market looks poised to yield nothing at all. Yields on the country's ten-year government bond are at an all-time low of -0.32%.

Another scramble for yield

Bond yields move inversely to prices, so a falling yield also implies a capital gain for the holder provided they can find a greater fool to sell it on to. Yet the latest rally may not have much further to run. The BOAML's monthly fund manager survey last week named "long Treasuries" as the world's most overcrowded trade. If inflation spikes then holders will be left nursing huge real terms losses. Another sign of irrational exuberance is the news that Austria is planning its second century bond issue. Investors are apparently willing to lend their money for 100 years in return for the princely yield of 1.2%. As Marcus Ashworth on Bloomberg puts it, "What fresh madness is this?"

The mad dash for income is also blowing up bubbles. Insurance companies have taken to buying up packages of corporate loans known as "collateralised loan obligations", Pascal Christory of AXA France tells The Wall Street Journal. A "tsunami" of money is now pouring into such alternative investments. To make matters worse, the US corporate debt market is now more overheated than it was prior to the financial crisis.

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The charts that matter: a correction for gold and better news on US jobs
Global Economy

The charts that matter: a correction for gold and better news on US jobs

Having ended on a record high last Friday, gold took a big tumble this week. John Stepek looks at the gold price chart, along with the others that mat…
15 Aug 2020
The charts that matter: precious metals, longevity and a cure for baldness
Global Economy

The charts that matter: precious metals, longevity and a cure for baldness

As the gold price presses on to new highs, John Stepek looks at he charts that matter most to the global economy.
8 Aug 2020
Is the bond market wrong about inflation?
Government bonds

Is the bond market wrong about inflation?

The bond rally suggests that markets are sanguine about inflation, but the gold rally suggests inflation is a real threat.
7 Aug 2020

Most Popular

No, the UK did not “plunge” into recession yesterday
UK Economy

No, the UK did not “plunge” into recession yesterday

That the economy took a massive hit due to Covid-19 should be news to no one, says John Stepek. The real question is what happens now.
13 Aug 2020
Inflation spiked in the US last month – is this the shape of things to come?
US Economy

Inflation spiked in the US last month – is this the shape of things to come?

Prices in the US rose much more dramatically than expected in July. Can we expect more of the same, and what does that mean for your money? John Stepe…
14 Aug 2020
The MoneyWeek Podcast: house prices, staycations, and the death of cash
House prices

The MoneyWeek Podcast: house prices, staycations, and the death of cash

John and Merryn talk about the rise in UK house prices and the fact that everybody is holidaying in the UK, plus gold's new highs, the death of cash, …
12 Aug 2020