The bond bubble is an accident waiting to happen
The bond vigilantes slumber. As the greatest sovereign bond bubble of all time rolls into 2009, investors are clinging to an implausible assumption that China and Japan will provide enough capital to keep the happy game going for ever.
They are betting too that debt deflation will overwhelm the effects of
near-zero interest rates across the G10 and nullify a £2,000bn fiscal blast
in the US, China, Japan, Britain, and Europe.
Above all, they are betting that the Federal Reserve chief Ben Bernanke will
fail to print enough banknotes to inflate the US money supply, despite his
avowed intent to do so.
Yields on 10-year US Treasuries have fallen to 2.4pc – a level that was unseen
even in the Great Depression. This is "return-free risk", said
bond guru Jim Grant.
It is much the same story across the world. Yields are 1.3pc in Japan, 3.02pc
in Germany, 3.13pc in Britain, 3.26pc in Chile, 3.47pc in France, and 5.56pc
"Get out of Treasuries. They are very, very expensive," said Mohamed
El-Erian, the investment chief at the Pimco, the world’s top bond fund, in a Barron’s
article last week.
It is lazy to think that China, Japan, the petro-powers and the surplus states
of emerging Asia will continue to amass foreign reserves, recycling their
treasure into the US and European bond markets.
These countries are themselves bleeding as exports collapse. Most face capital
flight. The whole process that fed the bond boom from 2003 to 2008 is now
going into reverse.
Woe betide any investor who misjudges the consequences of this strategic
shift. [my emphasis]
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