Six months after we warned about the massive loss potential resulting from a spike in bond yields, one month after Ray Dalio did exactly the same, when he warned the NY Fed that “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 one day after we documented that MTM losses from surging bond yields had surpassed a third of a trillion, the tally is now three times greater, with total MTM losses soaring to $1 trillion just two days after the presidential election.
As Bloomberg calculates, more than $1 trillion was wiped off the value of bonds around the world this week on concerns Trump’s policies will unleash a debt tsunami, and are seen boosting spending and quickening inflation. They are also expected to lead to much more QE as there will be trillions in government budget deficits that need to be funded.
As a result the Trump Tantrum, the capitalization of a global bond-market index slid by $450 billion Thursday, a fourth day of declines that pushed the week’s total above $1 trillion for only the second time in two decades, Bank of America Merrill Lynch data show. 30Y yields jumped the most this week since January 2009, and the week is not over yet.
At the same time, global stocks gained $1.3 trillion in the same period, on hopes inflation will lead to higher revenue; however this divergence will not last as a spike in inflation, if it arrives, will wipe out profit margins, and furthermore as Dalio explained to 17 year old hedge fund managers, “since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.“
More importantly, Robert Rennie, head of financial markets strategy at Westpac in Sydney, confirmed what we said previously, when he wrote in a client note that “we are seeing carnage in Asian FX markets. It’s providing a very strong reminder that the S&P 500 is not the correct barometer of Trump-driven risk aversion — it’s Asian currencies.”
And as a result of massive, pervasive central bank intervention overnight across Emerging Markets, it means that one again central banks are terrified of even the smallest drop in equity values – now propped up through the EM FX channel – although as Citi explained yesterday, even the Central Banks’ time is coming.
As we showed yesterday, Trump is making yields great again not only in the US but also in Europe, where government bonds extended their selloff Friday, with the yield on Italian 10-year securities climbing above 2 percent for the first time since September 2015, while benchmark German 10-year Bunds declined for a fifth day, pushing the yield to the highest since February.
“We do view the election of Donald Trump as a game changer,” said Adam Donaldson, head of debt research at Sydney-based Commonwealth Bank of Australia. “The strong bias toward fiscal expansion and inflationary policy represents a stark change to the malaise of recent years. This opens the door for the Fed to hike in December, but also more quickly in 2017 and 2018 than previously expected.”
The market value of Bank of America’s Global Broad Market Index, which tracks more than 24,000 bonds around the world, has slumped by $1.14 trillion this week to $48.1 trillion. The only previous week it fell by more than $1 trillion was in June 2013, when the Federal Reserve under Chairman Ben Bernanke was threatening to reduce debt purchases, leading to a bond selloff that became known as the “Taper Tantrum.”
Should bond yields spike again today, the Trump presidency week will go down in history books as leading to the worst global bond rout in history.
What is troubling for bond investors, who as recently as a few months ago saw all time record low global bond yields, is how quickly gains across bond markets have been wiped out: what promised to be a bumper years for bonds is in danger of evaporating. U.S. government securities handed investors a loss of 2.9 percent this week, paring this year’s gain to 6.3 percent. There’s an 80% chance the Fed will increase rates at its Dec. 13-14 meeting, up from 76 percent odds at the end of last week, according to data compiled by Bloomberg based on futures, which means even more losses.
Some see this as confirmation inflation is about to spike: “Inflation is rising worldwide, and we see the Fed hiking interest rates next month,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “The election has just added to that.” We disagree for the reason that there is simply just too much debt to sustain higher interest rates, and as a result the next global recession (if not depression) and market crash are around the corner.
Meanwhile, in the most troubling development, demand for U.S debt is waning. A $15 billion auction of 30-year bonds Thursday drew bids for 2.11 the amount available, the lowest since February. A sale of 10-year notes on Wednesday had a bid-to-cover ratio of 2.22, the least since 2009.
This means that as natural buyers of US debt dry up (recall that China is already liquidating its US Treasuries at a record pace), the Fed will have no choice but to launch another round of QE.
The most interesting question, at least for us, is how Janet Yellen will set the stage for the next debt monetization: historically it has involved a major economic slowdown; that however will be difficult at a time when the Fed is hiking rates, so look for the economy to “suddenly, unexpectedly” deteriorate in the coming months.
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