The world’s bond markets are set to deliver trillions of dollars, yen, yuan, and euros worth of losses. From Alex M. at wolfstreet.com:
Rarely do we investors get a market that we know is overvalued and that approaches such clearly defined limits as the bond market now. That is because there is a limit as to how negative bond yields can go. Their expected returns relative to their risks are especially bad. If interest rates rise just a little bit more than is discounted in the curve it will have a big negative effect on bonds and all asset prices, as they are all very sensitive to the discount rate used to calculate the present value of their future cash flows.
That is because with interest rates having declined, the effective durations of all assets have lengthened, so they are more price-sensitive. For example, it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest are embedded in the pricing of all investment assets, that would send them all much lower.
Those words are from the most successful hedge fund manager of all time — Ray Dalio. When he speaks, we listen.
There is now more than $13 trillion — that’s trillion with a “T” — of global debt that offers investors a guaranteed loss if held to maturity. Investors are now partaking in what can only be described as the largest game of “Greater Fools” in the economic history of man.
Wikipedia defines greater fool theory as when “the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price.”
With over $13 trillion dollars (which is over half of all Western debt) held by bond owners that are assured to get a lower amount in return than their principal, I suppose we can all agree this is prima facie an example of GTF on a Godzilla scale. Here’s the following via the WSJ (bolding is mine):
The pull to par has become a drag: a buy-and-hold investor is guaranteed to lose money, even before taking inflation into account. The only way to make money is to find another buyer willing to pay a higher price—but that implies a bigger loss down the road.
The crucial thing to understand is that these instruments are no longer bonds—at least not in the traditional sense. With no income attached to them, they are simply bets on the price another investor is willing to pay. They will also be more volatile: the long wait for repayment means small changes in yield will have a big effect on current prices.
Dalio said at the top of this passage that “there is a limit as to how negative bond yields can go.” Those limits have been reached, so naturally that now leaves us with only one direction for rates to go… UP.
To continue reading; How “Risk-Free” Bonds Will Trigger Bloodletting in Bonds, Stocks, other Assets
