On Monday, Kevin Muir (The Macro Tourist) asked if 10-year bunds were the most overpriced asset in the world.
The most overpriced asset is not German two-year Schatz at minus 69 bps, but instead German bunds at positive 45 bps. If you believe that the ECB will hit their inflation target come hell or high water, why on earth would you invest in a 10-year bund, locking in a negative 155 basis point loss in real terms? Yeah, eventually the two-year will rip higher when the ECB takes their foot off the gas, but I suspect the yield curve will only get steeper in the years to come. If the two-year sh*&s the bed, the ten-year destruction will be epic.
Kevin is probably right, but he didn’t get any help from the ECB this morning when no fewer than six sources told Reuters that “policymakers now disagree on whether to set a definitive end-date for their money-printing program when they meet in October, raising the chance that they will keep open at least the option of prolonging it again.”
Well needless to say, the longer that goes on the longer expensive assets can stay expensive by virtue of the fact that the money being printed is being funneled into those very same expensive assets. See how that works? It’s easy for things to stay in a bubble when the people with the printing press keep buying them. As it turns out, it’s easy to adopt a price insensitive approach to asset purchases when you can print an unlimited amount of money thus ensuring that the assets you’re buying with the money you just printed keep appreciating. Must be nice.
Anyway, that pushed bund yields a bit lower and as Bloomberg’s Kristine Aquino noted a few hours ago, there’s just “No Country For Bund Bears” these days. To wit:
Sorry, bund bears — looks like hopes 10-year yields will rise back above 0.5% this month are fading. The latest blow is a Reuters report that the ECB is debating whether to set a firm end date for bond-buying or not — raising the likelihood that policy makers will sit on their hands for awhile yet.
So bunds will likely continue to be overpriced although we’re definitely rooting for Kevin.
But are bunds truly the “Most Expensivest Sh*t“?
Let’s have a look at an updated version of Goldman’s “expensiveness” table to find out:
As it turns out, European junk is the most expensive asset class, followed by U.S. equities. Of course the “expensiveness” of govies at this juncture depends on whether you want to use a model or whether you want to use common sense and as the excerpted passage above from Kevin makes clear, common sense dictates that bunds are a screaming short.
Still, it’s hard to argue that € HY doesn’t have a claim on the top slot in the 2 Chainz “Most Expensivest Sh*t” list. And to understand why, all you have to do is recall the following set of charts from BofAML which we present (again) with no further comment….
