Bonds: A Crowded Trade
In the financial markets, we have been waiting for a crash of U.S. stock prices. And waiting. And waiting. It still hasn’t come.
Last week the spectacular bull market in U.S. stocks that began in March 2009 continued with even more gains. On Friday, the S&P 500 hit another all-time high.
But the real action was in the bond market. Over the last three weeks, about half a trillion dollars has been wiped off the value of global bonds … despite lower than normal trading volumes.
According to Citigroup strategist Mark Schofield, the sell-off is a “stark reminder of just how congested a lot of market positioning has become.” This makes it “increasingly difficult for investors to exit those positions when the time comes to do so.”
As Bloomberg reports:
“That means that it will be increasingly difficult for central banks to start backing away from their unprecedented stimulus efforts as growth takes hold – no matter how much they may want to – without causing a massive traffic jam of investors all trying to sell at once.”
Uh … yes.
Click on picture to enlarge
Italy’s 10 year government bond yield – an example of recent bond market indigestion
A Modern-Day John Law
Nobody knows whether the recent correction in bond prices (and the accompanying rise in yields) will continue or not.
It is almost too classic to believe. Serious economists – and anyone with any common sense – have realized for centuries that you can’t increase the quantity of debt without also decreasing its quality. The more you owe, the less likely you are to pay.
But central banks have been encouraging businesses, households, and governments all over the planet to take on more debt. They claim this will “stimulate” the economy… and that the resulting “growth” will make it easy to repay the debt.
Mario Draghi, the John Law of modern central banking, told us that the European Central Bank would persist in its delusions. (Law was a Scottish economist and gambler. In 1716, he set up the world’s first central bank in France and was responsible for the Mississippi Company bubble – a precursor to other paper-money-induced bubbles.)
