A turning point in the bond market?

A turning point in the bond market? by

We’ve recently seen a lot of coverage and even more “expert analyses” on the state of the bond market, to the extent that the average investor, or the average citizen for that matter, is likely to be overwhelmed and very confused about what it all means. Experts from the institutional side and defenders of the current monetary direction argue that it is all the result of policy choices, that’s it’s all under control and that we really shouldn’t worry about the extreme phenomena and distortions we now see in the debt markets. However, it hardly takes an economist or a monetary policy expert to spot the many faults of this position.

Reality check

To strike at the core of this issue, we only need to examine a very basic question: Would you lend me $100 and agree to receive $90 in return? Somehow, I doubt I’d find many takers for this deal, yet when it comes to the bond market, this is where we are. As of the end of last month, 30% of all investment-grade bonds, amounting to over $17 trillion, have negative yields, meaning that buy-and-hold investors are guaranteed to make a loss.

And then there’s another simple thought experiment: Given the fact that there’s an opportunity cost to consider, inflation and that there’s always a risk of default in any loan, would you demand a higher interest to lend someone money for a week or for 30 years? While most rational people would naturally expect to be compensated more for a longer-term loan, the market has turned this notion on its head. In August we saw exactly that, short-term bonds paying more than long-term bonds, in what financial publications called the “inverted yield curve”, a phenomenon we haven’t seen since the beginning of the last recession. While mainstream commentators were quick to dismiss the importance of this move, conservative investors and experienced market observers sounded the alarm, especially as they pointed out the historic correlation between the inversion and the start of a recession. In fact, the inversion has preceded every single recession in the past 50 years, with only one false signal.

More recently we also saw flashing warning signs from a sudden spike in repo rates. The $1 trillion repo market allows banks to lend money to each other overnight and rates usually range around 1.5% – 2.25%. In late September, a liquidity crunch forced rates much higher, while some repo rates exploded to almost 10%. This pushed the federal funds rate higher, shooting past the upper limit of the Fed’s own target range, raising serious questions about whether the central bank is actually losing control of its monetary policy. This anomaly was strongly reminiscent of the 2007 housing market crash, when repo markets also suddenly tightened right before the crash, while it also provided a clear indicator that there aren’t enough reserves in the financial system for repo markets to function at the Fed’s target levels. This shortage of cash forced the Fed to intervene and provide the missing liquidity, by injecting $105 billion into the system.

Continue Reading / Claudio Grass >>>

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Rory Hall, The Daily Coin and Gospel News Network. Beginning in 1987 Rory has written over 1,400 articles and produced more than 500 videos on topics ranging from the precious metals market, economic and monetary policies, preparedness as well as geopolitical events. His articles have been published by Zerohedge, SHTFPlan, Sprott Money, GoldSilver, Gold Seek, SGTReport, and a great many more. Rory was a producer and daily contributor at SGTReport between 2012 and 2014. He has interviewed experts such as Dr. Paul Craig Roberts, Dr. Marc Faber, Eric Sprott, Dr. Warren Coates and Peter Schiff, to name but a few. Don't forget to visit The Daily Coin and Gospel News Network to enjoy some of the best economic, precious metals, geopolitical and preparedness news from around the world.