Juggling hand-grenades with the pins pulled out


Do people need a reminder in bond duration? The longer the life of a bond the more  susceptible it is to changes in interest rates (not to be confused with the coupon rate). While you might have a 5% coupon bond which pays you that, if prevailing interest rates are much lower then your bond is worth a lot more because you can collect 5% so anyone who wanted to collect that 5% would have to compensate the difference. That is why bond prices move. However if you buy the bond at 1% effective yield your bond will be pretty expensive but if interest rates were to double to 2% the impact to your bond price would be pretty drastic versus if you bought the bond at 10% and it went to 11%. The same 1% move would create two different results because of the “scale of the move.


We are now at the thin end of the wedge. There are $10 TRILLION in negative interest yielding products. The average sovereign debt rate is 0.67%. So if you are a pensioner or an asset manager who needs to go further out the yield curve you risk even greater potential losses if interest rates reverse. This chart above shows a 3 & a 10 year bond yield curve but a 30 year curve would be even steeper meaning at low effective yields any rise in interest rates would cause a collapse in prices but because shorter duration bonds yield often less than zero one is forced out the curve,.

I agree with Bill Gross’s assessment that this is a time bomb. The more this goes on the more people that want to save are being buried or forced into riskier asset classes that are already over priced. Hence my argument that people should be shifting to “hard” assets like gold and other precious metals. This is going to get ugly. Think about it. Most of the people buying negative rate products are the central banks themselves. It is debt monetisation. Just hit print money key and buy treasury debt. Sadly economics doesn’t operate like this because if it did they would have been better of doing it 16 years ago. This is an economic experiment that is trying to defy the laws of economics which have been set in stone. Sadly the pins of these hand grenades has been pulled. Detonation of the debt bomb is coming.

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