Easy money will keep inflating bond bubble

A usually sedate part of the investment world is clearly in a bubble.

There is no precedent for how expensive bonds are today, says John Authers on Bloomberg. A usually sedate part of the investment world is clearly in a bubble.When a bond rises in price its yield falls. A global government bond rally this year means that worldwide bonds worth a collective $16trn dollars are now trading on negative yields. But that hasn't stopped the buying. Since the start of June, German ten-year bund yields have fallen from -0.2% to -0.7%.

Why would anyone buy a negative-yielding bond? Because, as Mark Atherton explains in The Times, with interest rates on bank deposits turning negative in parts of Europe and Japan, people seeking low-risk investments are being forced to accept extremely low or negative yields. It's either that or take on more risk by buying corporate bonds. Yet pure speculation is another part of the picture with yields plummeting fund managers can realise a capital gain so long as they can later sell negative-yielding bonds on to an even "greater fool".

"Amateurs talk about stocks, but professionals study the bond market," says Paul Krugman in The New York Times. Bonds have a reputation for being more sober and rational than excitable equities. And low yields are "telling a tale of profound pessimism".

The alternative explanation is that the market has become completely untethered from the fundamentals, says Authers. UK perpetual bonds now yield less than at any time since at least 1700. No wonder. There has been a tidal wave of cheap and printed money in recent years, and investors reckon "central banks will have no choice but to keep cutting rates and printing money". With all signs that the cheap money will keep flowing, the bond bubble could continue to inflate for some time to come.

Recommended

Why the Bank of England intervened in the bond market
Government bonds

Why the Bank of England intervened in the bond market

A sudden crisis for pension funds exposed to rapidly rising bond yields meant the Bank of England had to act. Cris Sholto Heaton looks at the lessons …
30 Sep 2022
Bank of England spends £65bn to “restore orderly market conditions”
Budget

Bank of England spends £65bn to “restore orderly market conditions”

The Bank of England has said it will spend £65bn buying bonds to stabilise the financial markets after the government’s mini-Budget. Saloni Sardana ex…
29 Sep 2022
The end of cheap money hits the markets
Stockmarkets

The end of cheap money hits the markets

Markets have swooned as central banks raise interest rates, leaving the era of cheap money behind.
28 Sep 2022
What the return of the bond vigilantes means for investors
Government bonds

What the return of the bond vigilantes means for investors

The US Federal Reserve is dancing to the tune of the bond vigilantes, says Max King. Here’s what that means for stockmarket investors, the economy, an…
6 Sep 2022

Most Popular

Should you take a 25% tax-free pension lump sum in instalments?
Pensions

Should you take a 25% tax-free pension lump sum in instalments?

Taking out a 25% tax-free lump sum sounds appealing but it might not be the best way to manage your pension
30 Sep 2022
Markets may have bounced, but this is not the end of the bear market
Stockmarkets

Markets may have bounced, but this is not the end of the bear market

Stocks are back on the rise, commodities and precious metals prices are up – even the pound has rebounded. But none of this is typical of bull markets…
5 Oct 2022
October’s Premium Bonds: how to check if you are a winner
Savings

October’s Premium Bonds: how to check if you are a winner

NS&I has added almost 110,000 more prizes to October’s Premium Bond draw – are you a winner?
4 Oct 2022