Plenty of investors and market watchers over the last few months have looked at the record low yields in the US Treasury and corporate bond markets and determined that debt is just too darn expensive.
People have been pouring money into US bonds to get away from negative yields caused by central banks abroad, the thinking goes, and once central banks like the European Central Bank and Bank of Japan start to ease asset purchases bond prices will tumble as that source of demand is removed from the market.
Well if you think that, Albert Edwards is here to tell you that you’re totally wrong.
Edwards said he understands why people might assume yields are set to rise and prices fall (remember, yields and prices move in opposite directions), which would be a reverse of the more than 30-year decline in yields.
Political rhetoric is such that foreign central banks appear to be ready to ease up on buying bonds, lowering demand, while governments worldwide are preparing to issue more bonds as fiscal stimulus picks up, increasing supply. This will lead to a reconfiguration of the market and a price drop.
“It was only the UKs new Prime Minister, Theresa Mays blunt rejection of further QE as benefiting the rich and her promise to allow fiscal policy take the strain a total repudiation of the previous Tory Governments approach – that caused investors to sit up and smell the coffee,” said Edwards in a note to clients on Wednesday. “So the twin prospects of more bond supply and a much reduced appetite for further QE are freaking out bond investors.”
It may be surprising that the über-bearish Societe Generale strategist is not calling for a crash in the market, but in fact, the precise reason the bond market won’t sell off in his opinion is that everything else will tumble.
Edwards reiterated his long-held position that debt and economic trends in developed markets have put us on the precipice of another recession and when that recession emerges so too will corrective central bank policies that suppress yields.
“In the next recession, I see both more fiscal expansion and more QE,” wrote Edwards. “I expect US 10-year yields to converge with Japan and European yields at around minus 1% in the next recession.”
Edwards also notes that every bond investors that has expected yields to rise and prices to fall over the past 30 years have been wrong.
“Bond investors tend to be an inherently gloomy bunch, consistently forecasting, year after year, that yields will rise (see slightly out of date chart below but you get the idea),” wrote Edwards. “Perversely, bond investors hate to hear my opinion that bonds will rally as much as equity investors hate hearing prices will fall so I get a good kicking everywhere I go.”
And so as they have for 30-plus years, Edwards expects yields to keep diving and bond investors to be wrong yet again.
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