Has the Relentless Bid in Bonds Left Investors Locked Into Future Losses?


Has the relentless bid in bonds left investors locked into future losses? Will bond prices march ever onwards or can you see a potential top from here?

10 March 2020 | HYCM – According to Bloomberg, around $54.8 tln of the $60.7 tln of securities making up the Bloomberg Barclays Global Aggregate Index have negative real yields. This means investors have been happy to park their money, even if it means a negative real return. That tells you how strong the demand for bonds has been as 90% of the total bonds on offer are showing negative real yields.

Coronavirus to turn the corner in April?

The coronavirus is bad, and the worst is undoubtedly still to come. However, the Hang Seng and Shanghai Comp. traded higher on the session today with news of a further reduction in China’s additional coronavirus cases. President Xi also visited the epicenter of the Wuhan coronavirus outbreak in a symbolic move showing that China is controlling the virus outbreak. Is the coronavirus worst over for Hubei? Yes, it seems to be.

Now, if memory serves me right, the Hubei outbreak really got the market’s attention around Jan 23. I remember it was around then because I was shorting the N225 futures as market sentiment shifted. Around 6 weeks ago. So, back of the envelops stuff, it looks like a 6-week curve from onset to peak reduction. In 6 weeks’ time, the worst of the coronavirus will be behind us.

However, lots of investors will most likely find themselves locked into negative-yielding bonds. The US has around 88% of its market in negative real yields and the eurozone, Japan and New Zealand have more than 90%.

Bond bubble as negative real yields abound?

Bond real yields

My suggestion is that this could be the top of the bubble for bond prices. Others have been warning of it for months. Bonds have been bid and bid for good reason. However, in around 6 weeks’ time, this horrible virus will be behind us. Then bond prices may well look ridiculous and investors pull the plug.

This is especially the case when emerging bond markets do offer positive yields e.g. Malaysia, Singapore, Thailand, South Korea, Mexico, and Russia. A more genteel global economy could see risk assets being ditched. This looks like the view from the top for bonds. If not here, not far from it. What do you think? Unfettered optimism? Will bond prices march ever onwards or can you see a potential top from here?

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