A lot of people have been asking me: ‘What’s next?’
Sentiment everywhere is improving. In fact, I was astonished to hear such bullish talk from the likes of Anthony Bolton and Crispin Odey this last week. Their records and experience dwarf mine, but I see an intermediate top coming in the stock markets more or less now. In fact, I think we may have made it on Monday.
What’s more, I am observing a worrying trend in the bond market, both for US Long Bond (the 30-year US Treasury) and for UK gilts. Even now, after months of attention due to the Bank of England’s quantitative easing plans, I suspect that few people – or politicians for that matter – are really that interested in government bonds. But, believe me, the last thing we need right now is a collapse in the bond market.
Unfortunately, it could be just around the corner…
But perhaps more worrying are concerns over the bond market. The Federal Reserve has been buying into the US government bond market with the aim of lowering interest rates across the economy. But despite its plan – announced in March – to buy $300bn worth of T-bonds to keep rates down, long bond yields have actually gone up (yields rise as prices fall). Could this trend of rising prices, which has been in place since the early 1980s, finally be over? . . . . . .
The massive provision of credit or ‘liquidity’ from the US government has helped this recent stock rally. But if government’s own long-term borrowing costs go up, so – in the long run – will rates across the rest of the economy. This could add to the pressures on the US housing market, just as it seemed to be stabilising. Add to this mix the problems that may still lie ahead in credit cards, corporate loans and the commercial property market, and you can see that the problems of the banks, and the wider economy, are far from over.
Are higher interest rates just around the corner?
A collapsing bond market means higher interest rates. At the moment those in debt are not suffering too badly – those with tracker rate mortgages, for example, are sitting pretty at the moment. But higher rates will decimate anyone with any debt, be they individuals, companies or governments. They are the last thing the economy needs just now.
Now the Fed is still able to borrow in the shorter term at low rates, so this may not have an immediate impact. But the drop in bond prices in the last five months is an early warning sign that markets will only prop up even the world’s largest economies for so long.
Those who want to short the long bond might consider the US-listed exchange-traded fund, TBT. But with the bond market already having made a big move down, I do not see now as a good entry point. Keep an eye on this market though and await a pull back before entering.
China fears bond crisis as it slams quantitative easing
“A policy mistake made by some major central bank may bring inflation risks to the whole world,” said the People’s Central Bank in its quarterly report.
“As more and more economies are adopting unconventional monetary policies, such as quantitative easing (QE), major currencies’ devaluation risks may rise,” it said. The bank fears a “big consolidation” in the bond markets, clearly anxious that interest yields will surge as western states try to exit their QE experiment.
Simon Derrick, currency chief at the Bank of New York Mellon, said the report is the latest sign that China is losing patience with the US and aims to diversify part its $1.95 trillion (£1.3 trillion) foreign reserves away from US Treasuries and other dollar securities.
“There is a significant shift taking place in China. They are concerned about the stability of the global financial system so they are not going to sell US bonds they already have. But they are still accumulating $40bn of fresh reserves each month, and they are going to be much more careful where they invest it,” he said.
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/5286832/China-fears-bond-crisis-as-it-slams-quantitative-easing.html