The biggest bubble in history is starting to come undone

The biggest bubble in history is starting to come undone

If you bought a Canadian government 5 year bond last Monday, your entire return is now wiped out. The good news is that you can clip 0.5% coupons until 2025 and break even (before adjusting for inflation).

There goes your five year return

Rising US Treasury yields are getting all the attention but it’s increasingly a global story. Canadian 10-year yields just rose above their US equivalent for the first time since April.

Australian 10s rose 12 basis points to 1.73%, which is a 30 bps premium over their US counterparts.

In Italy, the story two weeks ago was a record low of 0.42% in 10s after Draghi stepped up to avoid an election. That’s reversed in a big way and they’re now at 0.77%.

In general, this is good news. Rising yields reflect optimism in a global economic recovery from covid-19. All economic data points to huge amounts of pent-up demand and I believe the latter half of 2021 through mid-2022 will be a wonderful time.

But the bond market has become it’s own beast. There are $17 trillion in negative-yielding bonds outstanding. Someone (and not just central banks) owns those along with many trillions more yielding under 1%.

Those are all going to be underwater in very short order and, like those Canadian 5s above, you need to mark those to market and you’re already looking at a 2% loss.

For now, the broader market is feeling much better about higher yields but at some point there are going to be some big losers.

This market is distracted by GME right now, but rates are the real story.

Credit: forexlive

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