Why are sovereign bond yields still so low? Simple: it’s the flow (not the stock) stupid. Something we and a few other folks have been saying for a long – long – time.
And “tapering” (if you really want to call it that) notwithstanding, the following chart shows that ~42% of the € fixed income market is still yielding below zero.
As Bloomberg’s Richard Breslow notes on Wednesday morning, “people love the Plunge Protection Team conspiracy theory when looking at equities [but] that’s exactly what is happening in bonds, [except] right out in the open.”
Of course still suppressed sovereign yields don’t say much for the viability of the global recovery/reflation meme, but it could very well be that the PPT bid aside, the data is actually encouraging if you look beyond the US. That would presage a more hawkish approach from the world’s second-most dovish central bank. In turn, one might ask whether it still makes any sense to buy bonds here.
The answer, Breslow says, is “yes” – as a hedge on the equity position you “hate.” In short, you should “buy bonds as an equity hedge and hope to lose money.” More below…
It’s become very fashionable to get on the bandwagon that sovereign yields are never, or at least no time soon, going to rise. A number of the biggest banks have joined the parade just recently. This relies largely on making the obverse of the assumptions they stated with great assurance for much of this year. It’s also borne out of impatience for this conviction view to start working already. That’s not a great investing thesis.
- Contributing to this capitulation is the fact that U.S. numbers haven’t been nearly what analysts were hoping for. Even if they clearly show an economy that can’t be described as in crisis. But what isn’t accounted for in this line of reasoning is that global growth is improving further and faster than anyone factored in. It was a mistake to look at the U.S. in isolation at the beginning of the year and it’s just as questionable to do so now
- The last thing the ECB wants to do is upset the apple cart of peripheral markets, but it’s undeniable that they are beginning the process of softening up the market for an eventual change in policy
- With the numbers coming in strong and the rhetoric contemplating the when and how rather than if, every ECB event has become a major one. Whenever Mario Draghi speaks, traders will be listening on tenterhooks. After speaking in Madrid today, his next appearance will be at the post-ECB meeting briefing in two weeks. No coincidence, perhaps, that the Schatz yield is pushing year-to-date highs
- The U.S. two-year, for that matter, isn’t behaving as if last week’s Washington turmoil was a game-changer
- It’s common to point to dollar weakness and proclaim it’s a sign of a Fed that will have to climb down from its projections. Think of it instead as evidence that the rest of the world is doing relatively better. That doesn’t represent sad news and isn’t a reason to be bullish on yields
- So why haven’t yields responded? Making a flow rather than stock argument, it’s because the central banks are still buying a lot of bonds right on schedule. Are you willing to bet these amounts will hold steady or decrease over time? People love the Plunge Protection Team conspiracy theory when looking at equities. Well that’s exactly what is happening in bonds, right out in the open
- Despite all the headlines, of late, gold is doing a whole lot of nothing. Really not suggestive of a world that expects, at least at the moment, yields to plumb April’s depths. And if they do, your stop is only a dozen or so basis points away in the tens. An interesting risk/reward
- The best argument for buying bonds is a hedge for the long equity position you have and hate. But while that’s legitimate portfolio theory, it may no longer fit central bank thinking