What the Siege of Mafeking and the European bond market have in common

I’m reading the latest update from Ruffer’s Jonathan Ruffer. It’s always interesting, but there is one insight that I want to just quote for you. Why did one third of all euro denominated government short-dated bonds in March have a negative nominal yield in March, asks Ruffer. “The answer is that there was a famine of proper government paper needed as collateral.”

Quantitative easing had taken out swathes of it, and whenever there is a shortage, the price goes up. The thing to remember is that it is the circumstance, not the bond, which is the reason for the expensive price. “A bottle of water during the Siege of Mafeking reached a fancy price – the bottle became almost worthless when Mafeking was relieved; it has nothing to do with the water per se.”

This might be an obvious point to make, but Ruffer expresses it particularly well here. The price isn’t about the thing, it’s about the circumstance. Something for bond investors to remember when (if?) monetary policy begins to tighten.