One last rally for the bond bubble?
Posted on 31 August 2010 with 2 comments from readers
Poor old James Bond cannot get the money together to make another movie. Mr Bond is having a tough recession. It has been far better for another Mr Bond, the global bond markets, the largest and most important of all financial asset classes, bar perhaps real estate.
For as equity markets have lost their appeal since the global financial crisis, bond markets have been the big winners. An obvious bubble has formed in Mr Bond. Bond prices rise to the inverse of yields, so low yields are a sign of high bond prices.
Lowest yields
Last Wednesday British 10-year gilts fell to a record low of 2.84 per cent, while US T-bonds are at 2.5 per cent and German bunds 2.09 per cent. There is some $40 billion a month going into US bonds.
What is going to burst this bubble? ArabianMoney thinks this autumn is the last hurrah for Mr Bond. As equity markets crash the rush into bonds will accelerate. But how low can yields go before investors decide to bail out?
The risk of holding bonds rises as the bubble grows. The perceived safety of bonds becomes a death trap. British bond holders are already in negative yield post-inflation, and if the pound devalues as expected then this is clearly not a place to be invested.
Bond bulls point to Japan and its lost decade of low bond yields, and high bond prices. But Japan then did not have the same dependence on foreign bond holders or such an unstable global market outlook.
Corporate bonds
Corporate bonds also look pricey. They were a good buy immediately after the financial crisis but not now. More than 80 per cent of all UK corporate bonds trade above redemption value. That is a no brainer.
Would an equity crash this autumn then be immediately followed by a rally if the bond market crashed and money headed back into equities in pursuit of a higher return? This is certainly a possible scenario consistent with violent volatility in financial markets.
But some sort of cooling off period is likely if equities implode over the next couple of months and bonds head upwards again. Mr Bond lives to fight another day but not for much longer.
2 Comments posted by readers:
Hey, I was just guessing about Japan being the next black swan. The Nikkei just closed down another 3.6% in one session. That sucker has gone from 39,000ish to 8,824 today. Talk about a loss! And some pundit on CNBC yesterday said people should buy it. I think the Japanese economy is a ticking time bomb. Japan has a shrinking population, very few natural resources, and new, strong competition from Korea and other Asian neighbors. I worked with a Japanese woman once. SHE told me that Japanese aren’t particularly fond of non-Japanese people.
The Bond movies are getting too serious. That is why I liked the Roger Moore ones. You could get a few laughs. Great scenery too. Lately, they are trying to portray him as real. ‘For Your Eyes Only’ is my favorite. Sheena Easton’s singing of the theme during the credits is the sexiest song ever done. Roger said the same thing. Did you know that George Lazenby was offered a contract for seven Bond films as the replacement for Sean Connery. His agent convinced him to turn down the offer, telling him that the 60’s were over, and the world was changing. He only did one Bond film with Diana Rigg of ‘The Avengers’ fame. Roger Moore (talk about a life!) then went on to become a multi-millionaire, doing seven Bond films. That agent is lucky to have survived. The stories of actors turning down Bond films are strange. The best Bond theme songs are, ‘Live & Let Die’ by Paul and Linda McCartney & Wings, ‘For Your Eyes Only’ by Bill Conti & Michael Leeson, ‘A View to a Kill’ by John Barry & Duran Duran, and ‘The Living Daylights’ by John Barry & Paul Waaktaar of a-ha. The hardest thing you can try to do is to pick the most beautiful ‘Bond Girl’. It is actually stressful trying to decide. Then you realize that it is an impossible task. They all helped the UK economy. I’m sitting a few miles from where some scenes from ‘Live & Let Die’ were filmed on waterways near Slidell, Louisiana. Katrina erased both marinas shown in the film. Moore was injured filming a boat chase. He could have been killed because he hit his head. Oh, the article was about financial instruments, sorry.
I appreciate your short comments in the DT with the links to your website. I am constantly surprised that no one there gets into conversation with you about gold and silver.
Thank you for explaining bonds so humourously. I guess I’ve never really understood them, but your explanation that, as bond prices go up, their yield goes down, is crucially helpful to understand.
I understand that only about 0.8% of investments goes into gold. Hopefully this might rise to 1.0% at least, because with a virtually static supply side to precious metals, this should bring the price of gold up to your prophesied $5,000 per ounce, that is, 4 times what it is now.
Why do so few people invest in precious metals? Presumably because they don’t know where to keep the ingots once purchased. Well, I am very happily watching my stock of gold and silver go up in price whilst the ingots are stored for me by GoldMoney.com
Hope you don’t delete this post like last time. But, then, it was all about Jesus Christ and presumably that is not what Arabian Money does!