A short but rather uninformative article on Reuters suggesting there is some sort of bond bubble LINK1. I have warned about this some time ago LINK 2 and LINK3. The only real question marks in my view is (i) when will the bubble burst? and (ii) how high will the bond yield go to on the benchmark Treasury 10 year bond? Two very tricky but important questions - well lets look at 6 markets where the bond bubble exists and their current yield and my forecasts.
22 Sept 2014 Minimum by "Worst Case" by
Country 10 year yield Dec 2016 Dec 2016
USA 2.56% 4.50% 6.50%
UK 2.49% 4.50% 6.50%
Japan 0.55% 1.30% 3.00%
Germany 0.96% 2.00% 3.00%
Spain 2.20 % 4.20% 7.00%
Italy 2.38% 4.40% 7.00%
How do I come up with the above figure by December 2016 well it is all a bit heuristic but I do think the end of Quantitative Easing by the by the Federal Reserve will mean the bubble begins to unwind march 2015 onwards and UK and US interest rates are around 2% less than they ordinarily should be. Germany might be seen as a safe haven and therefore not suffer so much in a bond rout. Spain and Italy are also a minimum 2% too low. In a worse case scenario there is much more of a global rout and yields go up far more rapidly and the safe havens of Germany and Japan and the other 4 countries. Even my minimums will mean BIG losses for Treasury holders. I don't expect a Greek type of rout when Greek bond yields went from 4.5% to over 30% ! Japanese bond yields are currenctly a joke at 0.53% when the government has a 2% inflation target to be met by printing money like crazy it also has the highest national debt of 240% of GDP. Rigged markets eventually blow up and this bond market bubble will too.
22 Sept 2014 Minimum by "Worst Case" by
Country 10 year yield Dec 2016 Dec 2016
USA 2.56% 4.50% 6.50%
UK 2.49% 4.50% 6.50%
Japan 0.55% 1.30% 3.00%
Germany 0.96% 2.00% 3.00%
Spain 2.20 % 4.20% 7.00%
Italy 2.38% 4.40% 7.00%
How do I come up with the above figure by December 2016 well it is all a bit heuristic but I do think the end of Quantitative Easing by the by the Federal Reserve will mean the bubble begins to unwind march 2015 onwards and UK and US interest rates are around 2% less than they ordinarily should be. Germany might be seen as a safe haven and therefore not suffer so much in a bond rout. Spain and Italy are also a minimum 2% too low. In a worse case scenario there is much more of a global rout and yields go up far more rapidly and the safe havens of Germany and Japan and the other 4 countries. Even my minimums will mean BIG losses for Treasury holders. I don't expect a Greek type of rout when Greek bond yields went from 4.5% to over 30% ! Japanese bond yields are currenctly a joke at 0.53% when the government has a 2% inflation target to be met by printing money like crazy it also has the highest national debt of 240% of GDP. Rigged markets eventually blow up and this bond market bubble will too.
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