By Ven Ram, Bloomberg Markets Live analyst and commentator
For all the kerfuffle in the bond markets last week, valuations are still astronomical.
Last Wednesday, we had a double whammy in the U.S. with inflation soaring and an auction of 30-year bonds seeing the ugliest tail in a decade.
Those factors led to a scrum in rates, but like a flop Broadway musical, it seems to have been a short-run performance.
[ZH: yields extended today, with 30Y topping 2.00% and tagging stops on the FOMC Taper spike, before fading back below 2.00% into Asian trading.]
While a fleeting burst of inspiration may be enough to write an opera, an odyssey demands a lot more from its author -- and that sustained conviction is what is missing from bond vigilantes at the moment. For all the inflation that we have had across borders, investors have been rather lackadaisical in their response to it. In the U.K., retail-price inflation is running at almost 5%, and yet pension funds are willingly locked into 50-year bonds that yield well less than 1% -- meaning they are volunteering to lose money just for the privilege of being invested. In 2017, Austria issued a century bond with a coupon of just around 2%, and investors who think they can exchange their principal when it is eventually redeemed are almost guaranteed to see those sums have lost considerable purchasing power in nominal terms.
To be fair to those who bought such debt, it must be said that they perhaps have no intention of holding those securities until kingdom come -- meaning they are essentially showing their need to be invested and reaching for whatever yield they can grab. Indeed, pension funds that had bought, for instance, Austria’s ultra-long bonds at debut would have seen that component of their portfolio return an annual equivalent of 15%+ -- a measure even Warren Buffett would have been proud of.
With saving rates around the world soaring and central banks thinking they are saving the world with their artificially engineered lower rates and buying endless amounts of bonds, this was a denouement waiting to happen.
Oh, did I mention? There’s an auction of 20-year debt this week in the U.S., though I am not exactly holding my breath for an encore of what happened last week.