With ultra-long dated bonds flying off the shelf – as confirmed by the just issued inaugural 70 year bonds issued by Austria – fixed income investors continue to load up on record duration risk, which reminds us not only of a post we penned in June explaining just how massive the MTM losses would be as a result of a 1% rise in yields, suggesting that the Fed is trapped (daned if it doesn’t hike rates, causing massive MTM losses if it does), but to Ray Dalio’s recent presentation before the NY Fed in which he said the following:
… it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.
Today, thanks to Bloomberg we have an update on the actual size of the MTM losses as a result of a 100 bps increase in rates, something which central banks have been quietly trying to orchestrate as they seek to steepen yield curves and give banks some much needed Net Interest Margin. Here is the latest breakdown looking at just a subset of global debt, that captured by the BofA global government bond index, which excludes trillions in corporate bonds and other fixed-income linked instruments.
The rush into higher-yielding, long-term bonds has taken a key bond-market metric known as duration to historic levels. The higher the duration gauge goes, the steeper the losses will be when rates rise.
The effective duration on Bank of America’s global government bond index climbed to an all-time high of 8.23 in 2016, from 5 when it began in 1997. The metric set a record 5.9 for U.S. obligations, 7.2 across the euro area and 8.8 in Japan. A one-percentage point increase in interest rates equates to about $2.1 trillion in losses for global investors, based on a Bloomberg Barclays sovereign-debt index.
So call it DV01=$21 billion and rising at a record pace.
And while we don’t have the exact number, it is safe to say that when adding up the rest of global non-government duration exposure, the actual number is closer to $3 trillion in losses as a result of a 1% rise in yields; which is why we urge central banks, in the desire to push long-rates higher, that they tread lightly.
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