The Biggest Bubble of the Century: Government Bond Yields

Government bond yields under 10 years for safe-havens are close to zero. Even 20 year bond yields are less than 3%,

What can explain this bubble of the century?

Update April 24, 2013: (now with 30 years instead 20 years !!)

German Bunds 30 yrs. 2.19%,  UK Gilts 3.04%, US Treasuries 2.90%, Japan JGB 1.60%

20 year bond yields

Update February 23, 2013:

With the exception of Japan, yields of safe-haven countries are up 10-20% (see inflation as one explanation for higher yields) , while Italian ones are stable.

UK gilts 3.04% (despite recent downgrade), German Bunds 2.32%, Japan JGB 1.73% (still no sign of inflation or Japan bears), Switzerland 1.21%, Italy 4.43%

Update December 26, 2012:

UK gilts 2.77%, German Bunds 2.16%, Japan JGB 1.75%, Switzerland 1.00%, Italy 4.41%

Japanese JGB yields rise in line with Swiss ones, in response to potential higher inflation, but no signs of changes of default.

Update December 07, 2012

UK Gilts 2.68%, German Bunds 2.13%, Japan JGB 1.65%, Switzerland 0.87% and even Italy 4.59%.

Quick Starter for Government Bonds: Bloomberg Yields and Futures

Bloomberg Bonds Internet Quickstart	1M	3M	1Y	2Y	5Y	10Y	15-30Y	Yield curve
Switzerland (Eidgenossen)	yield	yield	yield	yield	yield	yield	yield
Germany (BuBills, Schatz, BOBL, Bund)	yield	yield	yield	yield futures	yield futures	yield futures	yield	Germany
France (BTAN,Oat)	yield	yield	yield	yield	yield	yield	yield
Italy (BTP)		yield	yield	yield	yield	yield	yield
Spain (Bonos)		yield	yield	yield	yield	yield	yield
UK (Gilts)	yield	yield	yield	yield futures	yield futures	yield futures	yield	UK
United States (Treasuries)	yield	yield	yield	yield futures	yield futures	yield futures	yield	US
Japan (JGBs)	yield	yield	yield	yield futures	yield	yield futures	yield	Japan

The biggest bubble of the century: Government Bond Yields

Government bond yields are at record-low levels from an historical perspective.

10 yr. US Treasury Yield Chart Since 1960

(click to expand)

How can investors judge today how the global economy is going in 20 years?

There is too much fear around, there is too much money around that goes into unproductive safe-havens like government bonds. See the investor letter of Kyle Bass, CEO of one of the most famous hedge funds, Hayman Capitals.

One day, employees want also a piece of the cake (see PIMCO’s Bill Gross), they will not leave the profits just to the share holders. These employees will not only be Chinese workers, that will start being consumers. They will push up European and American inflation via the back-door of imported goods. Due to aging issues also European and Americans whose wages will rise. Germany is one of the protagonists of this tendency, nominal wages increased by 3% and more in the last two years.

One indicator of fear are the drawdowns in equity prices often caused by premature rallying of equity markets after money injections by central banks.

Equity market drawndowns accumulate after 2008 (source Zerohedge)

Wage inflation and important sovereign defaults will come, aging and the smaller and smaller gap between established and developing countries will enforce it.  It is a just a question of when. History shows that both wage inflation and the simple fear of sovereign defaults can lead to self-fulfilling prophecies (see Roggoff’s and Reinhard’s book below).

Check here for Roggoff's Reinhard's book.

This double package of wage inflation and looming sovereign defaults, however, is far more explosive than just a single one of them.

Investors, including a global hedge fund with one of the biggest government bond holdings in the world, the Swiss National Bank, should be on alert. One day we might play the 1970 stagflation and the 2008 financial crisis at the same time.

Aren’t states allowed to default any more?

Spain defaulted on its debt six times in the eighteenth century, and seven times in the nineteenth century. At the time, a default was a lot easier than pressing out higher and higher taxes. Argentina has issues with its default still today

More data

By December 8, 2012 the tendency to negative interest rates has even intensified. Swiss 20 years government bond yields are at a yield of 0.87%.

The following was the data as of July 18th, at the height of negative interest rates. Still today yields of major safe-havens are similar.

Government bond yields under 2% (as of July 18th)

The following table from Bloomberg shows central bank after inflation (real rates) compared the government bond yields and the CPI as of October 2012.

The most recent data is available at the Economist :

Average 10 years Government bond yields provided by the ECB:

Government Bonds on Financial Times and on Forexpros

Marc Faber’s comments on the treasury bubble