One thing that should be self-evident, but is most assuredly not for the vast majority of retail investors who like to posit “alternative facts” to explain why the risk assets in their E*Trade accounts have been a one-way ticket higher for the past nine years, is that when you create a scarcity of something for which there is demand, the price for that something rises as everyone clamors for it.
That’s the whole goddamn premise behind ultra-accommodative policy. You work on the supply side of the equation by actually buying assets and thereby engineering a shortage of purchasable securities and you simultaneously work on the demand side by driving yields into the floor (and below), thereby engineering an epic global hunt for any semblance of yield. Obviously, that’s a self-fulfilling prophecy. Yields continue to fall, risk premia continue to compress, and that makes the hunt for yield even more desperate thus creating still more voracious demand, and on and on.
In that environment, prices literally have to rise, unless the law of supply and demand simply ceases to function as we know it. That’s a simplified version of the dynamic, but for God’s sake, the mechanics of this aren’t rocket science.
Well, in a testament to what this environment hath wrought, consider that from December 2008 through today, the world has lost a truly incredible $25 trillion in fixed income yielding over 4%:
Here’s BofAML’s Barnaby Martin:
One bullish theme is common to most of our global outlooks: that of a scarcity of bonds. Tax reform will likely detract from corporate bond supply in the US next year and, over time, should lead to a slowdown in market growth. In Europe, the surge in corporate cashflow in 2018 will reduce high-grade supply as issuance needs drop. Moreover, in European high-yield, the bond-into-loan refinancing trend should continue to reduce the stock of single-B corporate bonds outstanding.
But this is only one part of the story. Investors across the globe are still very much in need of quality yield, in our view. Since the Financial Crisis, the world has lost a staggering $25tr of fixed-income assets that yield above 4%.
What can put the brakes on that trend? Well, normalization and less transparency from the powers that be. “Until central banks become a lot more hawkish with their commentary, the need for quality yield is unlikely to dissipate, we think,” Martin goes on to write.
But see that’s the conundrum. The whole point of forward guidance and the two-way communication loop with markets is to avoid a disorderly unwind of the bond trade.
What few ever talk about, is that for every dollar a borrower saves in a low interest rate environment, a lender loses in lost income.
Yeah really. So I wonder, if interest rates were normalized again to 5-6%, quadrupling the lender’s income, would that boost spending on the part of all the savers who’ve been financially repressed with a decade of ZIRP and, by now, must have much pent-up spending needs?
Trying to stimulate spending with uber low rates for would-be borrowers who are already indebted up to their eyeballs, is like pushing on the proverbial string, I think.