The Bonds With A Draghi Tattoo

The Bonds With A Draghi Tattoo from MacroMon

On Tuesday,  June 27th,  Super Mario said this,

“Deflationary forces have been replaced by reflationary ones.”  – Mario Draghi

And here is how global 10-year bond yields reacted,

Bonds_Draghi

The German 10-year Bund yield increased 77 percent — OK, from a low base —  and bonds across the world from Canada to Australia to the United States were tattooed.

Change In Fundamentals? 
Absolutely not!

Bond yields haven’t been trading on economic fundamentals for several years due to central bank financial represssion via quantitative easing (QE), ZIRP and NIRP.   We have been pounding the table on this point,

Lot’s of hand wringing these days about the flattening yield curve.  We still maintain our position that the signal from the bond market is significantly distorted due to the global central bank intervention (QE) into the bond markets.   See here and here

Most of what is happening with the U.S. yield curve is technical. – Global Macro Monitor,  June 22, 2017

Beach Ball Effect
The major central banks have repressed interest rates throughout the world by engineering a structural shortage of high grade sovereign bonds with their quantitative easing (QE) programs.   For example,  as we posted last week, the combined market cap of just two stocks in the U.S. — Apple and Amazon — exceeds the entire stock of U.S. Treasury notes and bonds maturing in 2027-2047 when holdings of the Federal Reserve are excluded.

Market Cap and Treasury Float

This is tantamount to holding a beach ball underwater.  You know what happens when when the ball is released.  Such as when a prominent central banker unexpectedlyspeaks out that the days of holding that ball underwater may be coming to an end.  We just had a little taste of that this week.

Beach Ball_Draghi

 

Conclusion
The European Central Bank tried to walk back or dilute Draghi’s comments, but bond markets are not having it.   The train has left the station and the path toward monetary normalization is, at least in rheotric, been entered into the GPS.    The next few months shall be interesting.

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