Bill Gross, who manages the world’s largest bond fund, has indicated that the 30+ year old super cycle bull market in bonds has ended. This is very bad news for the markets.
First and foremost, if bonds fall, rates will increase. With higher rates, it will be harder to meet debt obligations. This will be the case for corporations as well as sovereign nations.
For the former, this means that more money going towards paying off debt and less going to shareholders. For the latter, sovereigns, this means default. Most sovereign nations in the developed world are sporting Debt to GDP ratios above 100%. These levels are just manageable with interest rates at record lows. When interest rates rise, default becomes a very real possibility.
In the case of the US, a 1% rise in interest rates means more than $100 billion more in interest payments. That money has to come from somewhere… which means either taxes going up, or the Government spending less on various programs.
For Europe, a 1% rise in rates can be almost deadly. Italy and Spain were both thought to be rock solid members of the EU. Once their ten year rates rose to 7%, they were suddenly on the verge of default.
And for Japan, if rates rise just a few percentage points, the entire system collapses.
For investors trying to navigate this market, it’s critical to note that the last bear market in bonds ended over 31 years ago.
This means that there is an entire generation of investment professionals and money managers who have never invested during a bear market in bonds. So many of these folks will be in a totally new environment.
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Best Regards,
Graham Summers