On Thursday, SocGen’s incorrigible, yet affable, bear Albert Edwards explained why, in his estimation, the relentless rally in bonds is not a bubble.
For Edwards, what you’re seeing in government bond yields is just “the next phase of the Ice Age”, a reference to the overarching framework that underpins his view of the global economy and markets.
Good people can disagree with Albert, but the last several months have provided more than a little validation for parts of his long-held thesis.
But if government bonds aren’t a bubble in Edwards’s view, what is?
Well, corporate credit for one thing.
“When you see the creeping advance of negative bond yields throughout the investment universe, you really start to doubt your sanity”, he said Thursday, on the way to noting that “for me, it is not so much that 10y+ government bond yields are increasingly negative, but when European junk bonds go negative I really start to scratch my head”.
We’ve touched on that before. Negative-yielding junk bonds are a “thing” now across the pond. As BofA’s Barnaby Martin observed in July, “ten Euro-denominated high-yield bonds now yield below zero, a mixture of both callables and bullets”.
As we put it last month, that visual captures what is perhaps the ultimate expression of NIRP-ian™ insanity – negative-yielding “high” yield bonds.
Of course, the whole concept of a “high” yield bond yielding less than zero is every bit as silly as it sounds. BofA’s Martin rather dryly calls it “an unfortunate oxymoron”.
In € IG, the picture is simply stunning. Negative yields are set to become the norm rather than the exception.
You can perhaps understand why SocGen’s Edwards contends on Thursday that “bubbles are not in the government bond market… they are in corporate bonds”.
Naturally, Albert says stocks are a bubble too, and as you can probably imagine, he isn’t particularly enamored with the notion that helicopter money and fiscal stimulus are going to be enough to save us all from financial ruin.
“Does anyone seriously believe that in the next global recession equity markets will not collapse? Do market participants really believe fiscal stimulus and helicopter money will save us from a gut-wrenching global bust that will make 2008 look like a picnic?”, he asks, before wondering if “the longest US economic cycle in history” might have “beguiled investors into soporific complacency”.
He hopes that isn’t the case, but as ever, Albert fears you aren’t fearful enough.