"The Damage Could Be Massive" - How Central Banks Trapped The World In Bonds

Tyler Durden's picture

Yields on $7.8 trillion of government bonds have been driven below zero by worries over global growth, forcing investors looking for income to flood into debt with maturities of as long as 100 years. Worse still, as Bloomberg reports, central banks’ policy is exacerbating matters, as the unprecedented debt purchases to spur their economies have soaked up supply and left would-be buyers with few options. This has driven the 'duration' - or risk sensitivity - of the bond market to a record high, meaning, as one CIO exclaimed, even with a small increase in rates "the positions are so huge that the damage can be massive... People are complacent."

Decelerating economic growth worldwide, combined with more aggressive stimulus measures by the Bank of Japan and the European Central Bank, pushed average yields on $48 trillion of debt securities in the BofA Merrill Lynch Global Broad Market Index to a record-low 1.29 percent this month, compared with 1.38 percent currently.

Such low yields are unnerving some of the most famous names in the bond market.

Gross, who runs the $1.3 billion Janus Global Unconstrained Bond Fund, said in a recent tweet that a tiny move in Japanese 30-year government bonds could wipe “out an entire year’s income.”

It won’t take much of a backup to inflict outsize losses.

The effective duration of the global bond market, which is measured in years and determines how much prices are likely to change when interest rates move, surged to an all-time high of 6.84 years in April.

That translates into a 6.84 percent decline in price for every percentage-point increase in yields.


Simply put, a half-percentage point increase would result in a loss of about $1.6 trillion in the global bond market, according to calculations based on data compiled by Bank of America Corp.

This year alone, the danger of owning debt has surged by the most since 2010, raising concerns from heavyweights such as Bill Gross. It’s also left some of the world’s biggest bond funds, including BlackRock Inc. and Allianz Global Investors, at odds over the benefits of buying longer-dated bonds.


“It takes a fairly small move out in rates on the long-end to wipe out your annual return,” said Thomas Wacker, the head of credit of the Chief Investment Office at UBS Wealth Management, which oversees $2 trillion in assets. Longer-maturity debt is “not something we are particularly keen on,” he said.

Investors continuing to buy bonds even when they pay next to nothing suggests deep concern over the state of the global economy. This month, the International Monetary Fund warned the threat of worldwide stagnation was rising because economic expansion has been so tepid for so long. It also chopped its 2016 growth forecast to 3.2 percent from 3.4 percent in January.

“The price of these bonds increase at an accelerating rate,” said Brian Tomlinson, Frankfurt-based global fixed-income manager at Allianz, which oversees about $500 billion, referring to the market’s longest-term issues. “Economic growth continues to disappoint globally.”

So between the deflationary spiral that historic zombie-reviving central bank policy has enabled and the outlook for more zombifying central bank 'stimulation' ahead, the central planners have cornered the world into ever risky "sovereign" bonds and while that risk hits record highs, The Fed is trying to topple the applecart (at least with its jawboning) whioch - as we have shown above - would leave an even larger hole in both bank and public pension fund balance sheets.

“People are complacent,” Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA, which oversees more than $17 billion, said from Milan. “Time is against the long end of the bond market. Even if an increase in bond yields may not be so strong, the positions are so huge that the damage can be massive.”

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silverer's picture

When people have figured out what they are working with is paper and nothing more, and when that promise of somehow coming out ahead with it is totally faded and gone, they will look to the safest solution. And it is in very limited supply.

NoDebt's picture

Yeah, but I think I speak for everyone when I say:  Thank God we saved the banks.  It was all worth it for that.  All of it.

Theonewhoknows's picture
Theonewhoknows (not verified) This Might Hurt Apr 25, 2016 12:55 PM

The important part here is still while knowing how everything is manipulated to make sure you are on the upside. That you with your knowledge make money to be independent and say whatever you want to say while they take savings from the middle-class and make everyone poorer. I think this guy made a good point when he compared different markets according to CAPE and others. On top of that, he pointed to the cycle of capital transfers between developed markets and emerging ones. Worth watching. Especially second half. http://independenttrader.org/trader21-lecture-presented-at-fx-cuffs.html

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Theonewhoknows Apr 25, 2016 1:09 PM

I stopped reading your comments and I would be afraid to click on your link. It would be nice if you actually said something funny or relevant about the topic (or topics) covered in a story but the only thing I see you do is briefly comment and then post a link to the same site and you do this on every fricken ZH article! It reeks of inauthenticity. Or someone shilling for the website link that you post every single time. You might have reeled some people in if you actually said something intelligent and posted links to a variety of websites. But you don't.

John Kich's picture

Trump Got It Right Again. This Is the Undeniable Proof...

However the mainstream media isn't saying a word about it!

What are they really trying to cover up?


kliguy38's picture

You ARE referring to the "people" also known as sheep....???

tarabel's picture



It is perfectly possible to die in a sheep stampede.

DontWorry's picture

artifically low interest rates causes malinvestments that damage the real economy


asteroids's picture

Correct. Why the fuck would you ever own an asset where a small (ie 1%-2%) change in interest rate would wipe you out? Common sense tells you that holding bonds is incredibly risky.

Goldbugger's picture

The Damage will be massive they have extended the 4 year cycle into another 4 years. Never has this been done since 1896 and the inception of the DOW. Goodnight Irene...

"As a result of the extension of the current 4-year cycle, the underlying technical, fundamental, economic, social and political environment in which this extended 4-year cycle has occurred, I believe that this is THE most dangerous stock market environment since the inception of the Dow Jones Industrial Average in 1896."


CPL's picture

How is fiat ever run in a cycle?  Never.  It runs until the paper is all worthless. = DOW 36000!!  Bullish.

philosophers bone's picture

There's nowhere to run and nowhere to hide and the CB's will make sure of that.  Not even a fucking deposit in a bank which is now designated for bail-in.  How did we get here?  How do we get out?   How about Trump and Sanders supporters to pledge to start a bank run?  That could be an interesting alliance!!!  I've already done mine, so unfortunately can't participate.

coast's picture

In regards to silver, here is my take:  The Shanghai Gold Exchange created, silver went up until the comex smashed it back down...  1. The next smash will FAIL....2. A stand for delivery...3.failure to deliver...4. limit up, limit up, limit up...

game over for price manipulation...its not too far away in my opinion

medium giraffe's picture

Apparently you can create an economy out of bullshit.  For a while.

HRH of Aquitaine's picture
HRH of Aquitaine (not verified) Apr 25, 2016 1:13 PM

I don't understand bonds which is why I don't own any. But this article may be one of the scariest articles I have read this year. Bill Gross has been around a long time and is one very smart guy. He is not prone to hyperbole, either.

Kreditanstalt's picture

No one quite makes the connection...

"Decelerating economic growth worldwide" is DIRECTLY attributable to @45+ years of expanding the quantity of money and credit.

"Growth" (and yield) will never "return to trend".

RaceToTheBottom's picture

One giant Cash for Clunkers routine.

Robbing the future for present growth.  Well debt levels will not allow any more future...

NumNutt's picture

And this artical points out exactly why the whitehouse has told the FED "don't raise those rates yet!" they are waiting for the right moment. when it looks like the republicrats are about to win the election, Obama will pick up the phone to Yellin and start screaming "increase the rates!!!!!". Instant federal bankruptcy, marshal law, yadda yadda yadda...welcome to dictatorship...

Conax's picture

“People are complacent,” Fabrizio Fiorini, chief investment office.."

Fabrizio? He's the traitor that bombed Apollonia's car..  Michael was complacent, wasn't he..

Get him!

fed_depression's picture

Next step negative dividends.

fowlerja's picture

I thought that the bond fund managers were the "smart money"....are they running toward a cliff they do not see?....

InnVestuhrr's picture

Would be a huge problem IF the central bankers raised rates.

They won't because they can't, and if they are stupid enough to try it, watch what happens to the rates and central bank intervention after the markets and economies crash.