It appears that warnings that the government bond markets are bubbles is finally going mainstream.The US lender said investors face a treacherous moment as central banks start fretting about inflation and shift gears, threatening a surge in bond yields.
This happened in 1994 under Federal Reserve chief Alan Greenspan when yields on US 30-year Treasuries jumped 240 basis points over a nine-month span, setting off a “savage reversal of fortune in leveraged areas of fixed income markets”.
A similar shock this year is “likely” if the US economy continues to gather strength. “The moment we hear the first rhetorical talk of exit strategies by central banks this could turn,” said chief investment strategist, Michael Hartnett. There was already a whiff of this in the most recent Fed minutes.
“The period of Maximum Liquidity is close to an end. Yes, the Japanese reflation is gaining steam in 2013 but we regard this as the last of the great reflations. The big picture is a transition from deflation to normal growth and rates,” he said.
The 1994 bond shock - and seared in the memories of bond-holders - ricocheted through global markets. It bankrupted Orange Country, California, which was caught flat-footed with large bond positions. It set off the Tequila Crisis in Mexico as the cost of rolling over `tesobonos’ linked to the US dollar suddenly jumped.
Bank of America said the “Great Rotation” under way from bonds into equities closely tracks the pattern of 1994, with bank stocks leading the way.
Over the past seven years US investors have pulled $600bn from US equity funds and poured $800bn instead into bond funds. This process is going into reverse. Equity funds have drawn $35bn over the last 13 trading days alone, creating the risk of an unstable “melt-up” in stocks over coming months.
The Bank for International Settlements has issued an alert on the high-yield `junk’ bonds and mortgage debt, currently trading at record lows. The Swiss-based watchdog said parts of the credit market credit are “highly valued in a historical context relative to indicators of their riskiness.”
This would suggest that from now on the government bond mrkts are on very dodgy ground.
http://www.telegraph.co.uk/finance/pers ... crash.html
I am about to sell my gilts/corporate bond fund holdings as I think that the good times are over for this asset and taking the modest profit I have developed since about a year ago.New figures seen by The Telegraph show that some bond funds could almost halve in value if there was a significant market correction.
This could hit the retirement prospects of large numbers of workers whose pension funds are often largely or entirely invested in bonds as they near the end of their working lives. Pension fund managers start to switch their members' assets away from shares and into bonds about a decade before retirement.
If the tens of trillions in government bond markets starts to flee, where will they go? Obviously equities, but also maybe alternative 'hard assets' like farmland, gold and silver.
