Is the great US bond bubble coming to an end? Could be. There has been no shortage of people warning that this day would come. Type “end of bond bubble” into your search engine and you’ll see plenty of predictions (many printed in Moneyweek).
Last year, they began to look more credible – Jim Grant called his October newsletter “The Death of Bonds” and back in mid-December, Halkin Services reported Ross Clark of Institutional Advisors noting that bond prices had “reached exhaustion levels”. It took another few months for these calls to be validated but here we are: “elite government bond markets have finally come a cropper”.
Last week, as Halkin puts it, “benchmark bond prices that had appeared well supported in a tight trading range were suddenly unsupported in a wide trading range.”
What caused the shift? It might be worries about the lack of new quantitative easing (QE) in the US; it might be the news that the US ran a $232bn budget deficit in February; or perhaps it is something to do with the wave of good news sweeping the US economy. After all, if deflation isn’t the biggest risk out there, and if US nominal growth is knocking around 4%, who wants to be holding ten-year bonds offering a yield of under 2%?
But it might also be something to do with China. I spoke to CLSA’s Russell Napier yesterday and he pointed out that in the second half of last year, China made its “largest ever sales of Treasuries, ending an 18-year-era of mass printing of undervalued renminbi and a massive distortion to the US-dollar yield curve”.
In December alone, China sold at least $20bn in US Treasuries. From the end of 2007 to the summer of 2011, foreign central banks bought around 45% of Treasury issuance (so something in the region of $2.2trn). Since then, they have been not buying but liquidating – something that clearly affects demand, and then yields.
It also means that someone else is going to have to start financing the US (savers?). And most importantly of all, it represents the beginning of a very major shift in post-crisis global rebalancing. I’ll return to this in more detail next week.