by
George Dorgan
My articles About meMy videosMy books
Follow on:LinkedINTwitterSeeking AlphaFacebook
CFA SocietyEconomicBlogs

Government bond yields under 10 years for safe-havens are close to zero. In April 2013, even 20 year bond yields are less than 3%, What can explain this bubble of the century?

Update August 16, 2013:

So, 10-year Treasury yields have ended the day closer to 3 per cent. But not as close as they were at about 8:30am New York time.

Though the afternoon recovery may generate some relief for fixed-income investors, with the US labour market data improving, few will confidently predict that yields won’t head higher still this year.

Here are three charts (courtesy of Bank of America) that will give bond bears cheer and those who believe yields are near their peak some pause for thought.

1, The Federal Reserve really has been a huge buyer of bonds over the last three years (see chart one), which compares the central bank purchases with those of private investors.

2, Flows into mutual bond funds have been substantial since 2009, eclipsing flows into equity funds. That pattern is changing (see chart two).

3, It’s not just China that is a big foreign buyer of Treasuries. Brazil, Russia and India [and the SNB] have been, too, (see chart three) as central banks have recycled growing volumes of foreign-exchange reserves into Treasuries. With investment flows into emerging markets slowing, reserve growth and the need to buy Treasuries should too. (source FastFT)

Update June 20, 2013:

With the potential “tapering” by the Fed, things start to normalize again a bit.
German 30yrs: 2.46%, UK gilts 30 rs: 3.46%, US 30 rs: 3.48%, Japan 1.86%

The Biggest Bubble of Century: Government Bond Yields

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	Inflation
Switzerland (Eidgenossen)	yield	yield	yield	yield	yield	yield	yield		Swiss inflation
Germany (BuBills, Schatz, BOBL, Bund)	yield	yield	yield	yield futures	yield futures	yield futures	yield	Germany	German CPI
France (BTAN,Oat)	yield	yield	yield	yield	yield	yield	yield		France CPI
Italy (BTP)		yield	yield	yield	yield	yield	yield		Italy CPI
Spain (Bonos)		yield	yield	yield	yield	yield	yield		Spain CPI
UK (Gilts)	yield	yield	yield	yield futures	yield futures	yield futures	yield	UK	UK CPI
United States (Treasuries)	yield	yield	yield	yield futures	yield futures	yield futures	yield	US	U.S. CPI
Japan (JGBs)	yield	yield	yield	yield futures	yield	yield futures	yield	Japan	Japan CPI

The biggest bubble of the century: Government Bond Yields

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

10 yr. Treasury Yield Chart Since 1960 - Click to enlarge

(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.

Government bond yields under 10 years for safe-havens are close to zero. In April 2013, even 20 year bond yields are less than 3%, What can explain this bubble of the century? Update August 16, 2013: So, 10-year Treasury yields have ended the day closer to 3 per cent. But not as close as they … Continue reading » - Click to enlarge

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) - Click to enlarge

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

About George Dorgan

George Dorgan (penname) predicted the end of the EUR/CHF peg at the CFA Society and at many occasions on SeekingAlpha.com and on this blog. Several Swiss and international financial advisors support the site. These firms aim to deliver independent advice from the often misleading mainstream of banks and asset managers. George is FinTech entrepreneur, financial author and alternative economist. He speak seven languages fluently.

My articlesAbout meMy books
Follow on:LinkedINTwitterSeeking AlphaFacebookCFA SocietyEconomicBlogs

You Might Also Like

Weekly SNB Sight Deposits and Speculative Positions: SNB buying euros at high prices

2021-04-19

Update April 19 2021: SNB intervening. Sight Deposits have risen by +0.2 bn CHF, this means that the SNB is intervening and buying Euros and Dollars: The change is +0.2 bn. compared to last week.

FX Daily, February 12: Animal Spirits Start the Weekend Early

2021-02-12

Profit-taking weighs on equity markets, and the dollar is trading higher ahead of the weekend. Most Asia Pacific markets are still closed for the holiday, but Victoria’s snap lockdown dragged Australian shares lower.

FX Daily, January 22: Faltering Friday

2021-01-22

Fear that social restrictions may have to be broadened and extended is helping spur a wave of profit-taking and de-risking, which has also been encouraged by disappointingly high-frequency data. The equity rally seemed to falter a bit in the US, as the S&P 500 eked out a minor 0.03% gain yesterday.

FX Daily, January 18: US is on Holiday, but the Dollar has Legs

2021-01-18

Overview: The new week has begun like last week ended.  Equities are a bit heavy.  The MSCI Asia Pacific Index fell for the second session, its first back-to-back loss since before Christmas.  China and Hong Kong were the notable exceptions, perhaps helped by stronger than expected GDP. 

FX Daily, January 14: Markets are Subdued Despite Impeachment and Record Chinese Trade Surplus

2021-01-14

Overview:  The capital markets are becalmed today. There does not appear to be much reaction to the news that the House of Representatives impeached President Trump an unprecedented second time with greater bipartisan support than previously (10 GOP voted with the Democratic majority). 

FX Daily, January 13: PBOC Sends Signal as Market Looks Past Impeachment Vote

2021-01-13

The US dollar is regaining ground lost in yesterday’s setback against the major currencies. Sterling is the notable exception. It was toying with the $1.37 area, perhaps helped by the Governor of the Bank of England signal that there still are hurdles to adopting negative interest rates, which the futures market is still discounting for as soon as midyear.

They’ve Gone Too Far (or have they?)

2021-01-10

Between November 1998 and February 1999, Japan’s government bond (JGB) market was utterly decimated. You want to find an historical example of a real bond rout (no caps nor exclamations necessary), take a look at what happened during those three exhilarating (if you were a government official) months.

FX Daily, November 16: Risk-On Despite Surging Pandemic

2020-11-16

Despite the surging pandemic and new restriction measure, risk-appetites appear strong to start the week. Led by 2% gains in the Nikkei and Taiwan’s Taiex, all of the Asia Pacific region’s equity markets advanced. European markets have followed suit and the Dow Jones Stoxx 600 is knocking on last week’s eight-month high.