Tulip bulbs, the Dutch East India Trading Company, Japanese real estate, tech stocks, US housing—what these disparate assets have in common is a history of bubbles. Sovereign bonds are set to join that list soon as their bubble nears its end.
A year ago, the 10-year US Treasury yielded 3.2% and essentially only Japanese bonds yielded less than zero. Today, negative-yielding bonds total over $16 trillion globally, with issuers ranging from Austria to Slovenia. Despite negative interest rates, massive inflows continue. Think about that. Sovereign governments are CHARGING investors interest to buy their bonds and yet people are still buying them! At negative yields, assets perceived to be the safest in the world may actually be among the riskiest.
Denial ain’t just a river in Egypt – In 1999, tech stocks defied all logic and valuations. Champions of the frenzy denied fundamental measures of value, calling it a “new paradigm.” In 2007, housing bulls pushed home prices sky-high, arguing that “housing prices never go down.” And at the height of the 17th-century Tulip Mania, one scholar claims that a single tulip bulb would have fetched enough to “purchase one of the grandest homes on the most fashionable canal in Amsterdam. Today, justification for this sovereign debt bubble includes arguments like “negative rates are normal.” If there was any doubt, one sure sign of a bubble is when people stop questioning whether it’s a bubble.
The contagion effect is real – When tech stocks deflated, a recession soon followed in 2001. The popping of the housing bubble in 2008 caused the deepest recession since the Great Depression. We can’t say for certain what will cause today’s conditions in government bonds to change, but when it does the outcome is not going to be pretty.
Source: Blackstone Joe Zidle Chief Investment Strategist
Given our concern about this bubble, we are using alternative solutions for protection – staying mostly in shorter-term bonds, non-traditional bonds and investments that have the ability to adjust to rising interest rates.
Stay tuned – this could get interesting!
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