By Richard Breslow, former FX trader and fund manager who writes for Bloomberg
You Don’t Need a Taper to Price for the Event
Yesterday’s article on potential ECB tapering of their quantitative easing activities was important - even if you discount or outright dismiss its likelihood. No one was prepared to fade the news on the day and the reverberations were far and wide. If you were a bond market, of any stripe, and open for business, you got sold.
Investors are long global bonds and other bond-infected assets in outsized size, and not at all sure why, other than that central banks will keep buying and nothing will ever change again
As QE gets long in the tooth, it has increasingly relied on the greater fool theory to maintain itself. Take that assumption away and you’ll get a market resembling the pit scene from “Trading Places”
Rather than dismissing the news (or trial balloon) ask yourself what would happen to your portfolio if global yield curves began to normalize. Which doesn’t require outright tightening to happen. Something to at least consider when submitting your bids for the next super-longs. It takes a lot of rolling down to get home scot-free from a 50-year maturity at crisis yields
It’s all been about greed in order to survive in this desperate grasping-for-yield world. But more and more serious investors are trying, largely in vain, to point out that survival in the future may require getting to the exit on time. Taking a mark-to-market hit on a negative yielding bond is a nasty shock investors aren’t used to. And certainly not prepared for
There’s been an assumption that bond vigilantes were permanently run out of town when the new central bank sheriffs came to town. And that back-ups in yield were some form of anti-social behavior to be scorned. But some policy makers are coming around to realize that steeper yield curves just might be what we need right now. For a whole host of reasons. And reminders that that’s possible should be taken as gentle nudges to reconsider the concept of adding a dose of prudence to investing decisions
“Don’t say no one warned you” will be heard along with the wailing of the those who just wouldn’t leave the dance floor.
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