Blain’s Morning Porridge, by Bill Blain of Mint Partners
“Which is worse? Siberia and “the Beast from the East”, or Donald Trump; “the Pest from the West.”
Happy St David’s Day. Cheer yourself up with a daffodil! It’s a horrible cold, grey, windy and snowy morning here in London. The weather sums up what feels like a miserable market mood – but yesterday’s late stock sell-off was as much end of the month as anything else.
Where is the bond market going? The bellwether 10-yr US treasury is back down at 2.86%, continuing to flirt with the significant 3% yield hurdle. Over the last few days I’ve seen and heard anywhere from a 2.5% to 4.5% bond yield target over the next 6 months. Its divergence of views that makes a market! The point is to understand why everyone has such differing perspectives
Some folk think it’s still too early to call the start of a bond bear market, pointing to unresolved economic weaknesses, fears and doubts left from the last crisis capping long-term rates. They think it unlikely global central banks – jealous of their post crisis powers – will let global markets wobble or risk contagion. Others point to changed long-term dynamics: the global economy shifting from export-driven industrial growth to consumer services changing inflation dynamics. One number that caught my eye recently was the expectation there will be over 1.2 bln new middle class Asian’s spending money in the next 12 years! The lower-for-long bond bulls say don’t panic – future bond yields are likely to remain much lower, and that should change long-term investment thinking and allocations.
Others bond watchers think we’re already in the bond bear market, but are reckoning on limited damage. The recent rise in yields, and the growing unease felt about the tightness of corporate spreads, highlights a market looking to correct. Central bank rates may not rise much – but they will create losses for holders of high risk and convex fixed income product. Their general advice is exit so-called safe-haven bond markets and park cash in risk-assets, gambling that a sell-off in bonds won’t impact stock markets.
And, then there are the conventional bears who think the bond market is set for much more painful correction – but no need to overly panic as these things happen… again and again. There will be a shake out of corporate bonds, we will see spreads widen on risk bond products like hi-yield and bank capital – to reflect higher yields and also to more properly value their underlying risk. This is a periodic thing – markets get overly enthusiastic in bull phases, and sell-off when they smell the coffee of a bear market. It presents opportunity.
Certainly, the fundamentals suggest bonds are toast.
- The facts include the new Fed-Hed saying growth is strong. Inflation is rising, the global economy is expanding, and tightening will be the reality across economies.
- The rumours say the real agenda of central banks is to swiftly unwind QE before the unintended consequences of financial asset distortion burst bubbles, and correct expectations central banks will continue to bail markets with free lunches. Its no secret that many markets look like bubbles as a result of QE and Central Bank largesse.
- The chartists say the long term moving averages are clearly moving towards break-out (higher) yields.
The distortions of QE should be layered on top – like the number of corporates that used ultra-low rates to leverage up balance sheets to finance stock buybacks, and the number of yield tourists who have fuelled tighter spreads in risk sectors of the bond market. When QE ends – what replaces them as a market driver?
On the other hand, I read a fascinating interview with a leading fixed income investor – unfortunately in another broker’s note – where the portfolio manager was pointing to long-term factors such as worsening demographics, rising debt burdens, and the shift from commodity-demand driven production economies to consumerism will cap inflation. At the same time, the same factors will ensure strong demand for long-term bonds to match liabilities of aging populations – hence keeping rates lower for longer.
What’s my guess on long-term bond rates? I’m thinking 3.5-3.75% in 6 months.
via Zero Hedge http://ift.tt/2t6PiiT Tyler Durden