{"id":4955,"date":"2021-03-12T01:03:00","date_gmt":"2021-06-11T19:15:56","guid":{"rendered":"https:\/\/lundgreenscapital.com\/uk\/the-battle-about-the-bond-market-2\/"},"modified":"2024-07-31T08:51:48","modified_gmt":"2024-07-31T06:51:48","slug":"the-battle-about-the-bond-market-2","status":"publish","type":"post","link":"https:\/\/lundgreenscapital.com\/uk\/the-battle-about-the-bond-market-2\/","title":{"rendered":"The battle about the bond market"},"content":{"rendered":"

The higher yields in the US bond market expresses that inflation in the US is back at a fairly normal level of around 1.5 pct, which is only good.  If the dream is that the 10-year yield remains down at around 0.6 pct. (graph one), then I would seriously crisis adjust the investment portfolios. However, the financial markets have the prospect of further stress, as American inflation is expected to head towards 2.5 pct. Albeit only temporary, as commodity prices fell sharply last year, though there is good reason to pay extra attention to the developments. My concern level remains withing the middle of the scale, so to say– right now.<\/p>\n

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I found the drama surrounding the surge in bond yields towards the end of February remarkable. The Australian central bank doubled its intervention to push bond yields down again, and there was discussion about whether even the US Federal Reserve Bank would enter the market extraordinarily. In addition, Australian Treasurer Josh Frydenberg has given a warning that the huge stimulus packages can threaten global financial stability. Lately, China’s top bank regulator Guo Shuqing, expressed concern about the risk of price bubbles in the global financial market. A month ago, former US Treasury Secretary Lawrance Summers surprised everyone by expressing a strong concern about an overheating of the US economy due to the coming large stimulus packages. He was also very specific about the fear of a rising inflation.<\/p>\n

Now, one could argue that it is just a philosophic discussion and that the real world is different. However, the concerns that have been expressed are from remarkably respectable and knowledgeable people. But quite rightly, if one tries to predict market movements based on too much macroeconomic justification, then experience has shown that these predictions are just as wrong as when ordinary market participants try to predict the market moves.<\/p>\n

Lately, however, I have seen a number of long-term investors express concern that long-term interest rates could suddenly jump to unexpectedly high levels, with the comment from Lawrence Summers supporting this uncertainty.<\/p>\n

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Those particularly concerned could point towards Germany from exactly 100 years ago. Hyperinflation reached an unimaginable level in 1923, but the prelude began in March 1921 in the form of a first pressure on the German mark towards, for example, the US dollar.  A major reason for the hyperinflation was the debt from the First World War, as well as the compensation Germany had to pay. Germany did not have the necessary foreign exchange reserve, so the country printed more physical banknotes to be able to buy foreign currency.  That kind of action sends a country’s own currency into the death spiral.<\/p>\n

Since Germany did not pay the outstanding compensation, Belgium and France occupied the eastern demilitarized Rhineland in January 1923. Germany did not acknowledge the occupation and encouraged workers in the area not to go to work, but instead, the German government paid the workers’ wages. The state didn’t have income to cover this expense either, therefore even more banknotes were printed, thus bringing hyperinflation to unimaginable levels.<\/p>\n

The compensation for war damage cannot be compared to the situation today though.  Since almost 100 years ago, I cannot pinpoint anywhere in economic history where a state in the western world has paid the population\/workers to lay production still for months. It has been partly happening in several countries during this Covid-19 crisis and is obviously unsustainable.  However, I am not trying to predict a period of hyperinflation. The immediate biggest risk is that the coming rise in inflation will not move back lower again but will be replaced by newly created inflation due to higher demand caused by the economic stimulus packages, and this potential risk, I give quite a lot of attention.<\/p>\n

The thought back to Germany 100 years ago is one of the many pieces in economic history that one can learn from. The financial and credit markets functioned very differently then, but one should not underestimate the fact that the role of governments in the financial markets, now 100 years later, has again become very dominant. I am referring to the extreme bond purchase programmes, where graph two, as an example, shows the European Central Bank’s bond purchase in connection with the Covid-19 crisis.<\/p>\n

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The continued intervention in the bond markets could lead to a veritable battle about the bond market. If you look critically at the situation, the central banks’ purchases might express that no one else wants the bonds, just as no one wanted Germany’s paper money 100 years ago. It will become even more pronounced if inflation remains at a high level and especially on the day when doubts about a country’s financial stability arise. Before the Covid-19 crisis, it was my assessment that this risk could increase sometime around 2030, or later, but the crisis has amplified many developments. Therefore, the battle about the bond market may suddenly move closer.  Recently, Warren Buffet came up with his interpretation, namely that fixed income as an asset class is the wrong place to be for investors, however, he may mostly have credit bonds in mind.<\/p>\n

I therefore see no reason to change my expectation that the discussion about the fixed income market will flare up again when the virus is under control at some point. My assessment remains that an increasing number of investors will consider stocks in global companies as the best form of money preservation. It expresses that I am very aware of several critical developments, but I am not deeply concerned- right now.<\/p>\n","protected":false},"excerpt":{"rendered":"

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