SLL hasn’t liked bonds for almost a year. Yes, bonds have rallied for the last year, on the debt monetization bid from central banks. Sometimes good investments don’t work out and bad investments do. However, if bonds were a limited-upside, gaping-downside investment last year, they are even more so now. From David Stockman at davidstockmanscontracorner.com:
Sometimes an apt juxtaposition is worth a thousand words, and one from this morning’s news is surely that.
Last year Japan lost another 272,000 of its population as it marches resolutely toward its destiny as the world’s first bankrupt old age colony. At the same time, the return on Japan’s 40-year bond during the last six months has been an astonishing 48%.
We aren’t talking Tesla, the biotech index or the FANGs. To the contrary, like the rest of the JGB yield curve, this bond has no yield and no prospect of repayment.
But that doesn’t matter because its not really a sovereign bond, anyway. It has actually morphed into a risk free gambling chip.
Leveraged front-runners are scooping up whatever odds and sots of JGB’s that remain on the market and are selling them to the BOJ at higher, and higher and higher prices.
At the same time, these punters face virtually no risk. That’s because the BOJ already own 426 trillion yen of JGB’s, which is nearly half of the outstandings. And it is scarfing up the rest at a rate of 80 trillion yen per year under current policy, while giving every indication of sharply stepping-up its purchase rate as it segues to outright helicopter money.
It can therefore be well and truly said that the BOJ is the ultimate roach motel. At length, virtually every scrap of Japan’s gargantuan public debt will go marching into its vaults never to return, and at “whatever it takes” in terms of bond prices to meet the BOJ’s lunatic purchase quotas.
Surely, Kuroda will go down in history as the stupidest central banker of all-time. But in the interim the man is contributing—-along with Draghi, Yellen and the rest of the central bankers guild—-to absolute mayhem in the global fixed income market.
That’s because these fools have succeeded in unleashing a pincer movement among market participants that is flat-out suicidal.To wit, the leveraged fast money gamblers are chasing prices ever higher as the sovereign bonds of “open to buy” central banks become increasingly scarce.
At the same time, desperate bond fund managers, who will loose their jobs for just sitting on cash, are chasing yields rapidly lower on any bond that still has a positive current return.
This is the reason the 30-year US treasury bond has produced a 22% return during the last six months. To say the least, that’s not shabby at all considering that its current yield is just 2.25%.
Today’s Wall Street Journal piece entitled, “35-Year-Old Bond Bull On It’s Last Legs”, quotes a European fund manager that explains why everything is going haywire:
Neil Dwayne, global strategist at Allianz Global Investors,is still buying. “Every piece of analysis we do on the bond market tells us they are structurally overvalued,” he said. But he is buying Treasurys anyway. “That’s what you have to do when you have the ludicrous valuations in Europe and Japan.”
Exactly. The poor man is buying a bond he hates because Draghi and Kuroda have driven him out of what amounts to a $15 trillion corner of the sovereign debt market.
To continue reading: Bubbles In Bond Land——It’s A Mania!