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Global bond backup

There's a big move afoot. Very big.

Nobody seems to have noticed yet but there is a backup in government bonds everywhere. And when this blog says everywhere, it means everywhere:
 United Kingdom: South Africa: Ironically, the obvious trigger for this co-ordinated slump was QEII. Markets have been re-pricing government debt upwards ever since. Also pushed along, no doubt, by EQE, Chinese inflation and improved US data.

An associated explanation is that the global scare of a double dip recession has also passed, as reflected in rising equities everywhere over the same period. Bond rates are still low in historical terms so there's no inflation panic here ... yet.

Looks to this blogger like for the time being there is a coordinated and global sigh of relief underway. The interesting thing is that it's happened right through the European debt crisis which would normally result in falling yields in safe havens.

That suggests two possible future scenarios. Global bond yields are in the early stages of pricing a surge in global inflation, which is possible given the massive inflation underway in soft and hard commodities. Or, bonds have oversold and will revert as US and European growth disappoint.

However, that will, of course, trigger more QE. And more bond weakness.

We could be witnessing an historic turning point.
Posted by David Llewellyn-Smith at 6:22 AM 
Successful QE will, by definition, make the assets it buys, a terrible investment.

In the space of a few weeks, market participants have become almost universally bullish. Mix in some extended tax cuts to void the assumption that monetary stimulus was the only option...and...bang.

Ironically, the possibility of a reduced need for further QE may well just choke off the recovery enough to warrant...further QE.

Or maybe the bond vigilantes are just starting to dust down their leathers...

Interesting time, too, as we think about themes for 2011. Despite having held duration as the only real diversifier and deflation hedge on offer (although deep out of the money AUD puts might be worth a look...), going into 2011 I really have no desire to hold any type of bond, anywhere in the world.

Let the fun begin.

December 10, 2010 at 9:42 AM