While global interest rates have risen from all time lows, starting around mid-2016 when the China (not Trump) reflation trade hit and has since fizzled, in the process cutting the amount of negative-yielding debt by almost half, the reality is that rates still remain painfully low; so low that many banks have recently issued pieces asking if the world - awash in record debt - can handle a sizable increase in rates.
Perhaps the world won't have a chance to find out: following the recent inflation prints, it appears that the reflation trade has officially ended, as expected here in February when we showed that the Chinese credit impulse fizzled; instead - and in line with Trump's latest "weak dollar, low rates" policy - what may come next is not a spike in yields and a "controlled" steepening of the curve, but yet another washout to the downside, as all those predicting the end of the great bond bull market are proven wrong, again.
Or maybe this time central banks will not step in as the latest reflationary handover from China to the "developed world" fails and will finally allow the market to clear, stepping away from promises (or actions) of more QE, NIRP of "yield control", in hopes of inverting cause and effect, and stimulating inflation by letting go of forward rates.
If so, here is a handy chart from Goldman which shows two things:
- First: the full breakdown of notional amounts of some $36 trillion in global debt, from over $10 trillion in European sovereigns to a tiny sliver of European junk bonds, and covering the entire yield gamut, starting with US junk bonds at the top, and ending with the ECB's favorite European collateralized securities.
- Second, and perhaps just as important: the deviation between current yields and the post-crisis median.
If, as many expect, we are about to see a mean reversion in credit metrics, then the chart below provides several distinct arbitrage opportunities as yields either spike or slump to their post-crisis averages, most notably in Europe and the UK, but also potentially in the US where short-end (1-3Yr USTs) yields may have no choice but to slide if and when the Fed admits the tightening experiment was a failure (see the Ghost of 1937), and things go back to abnormal.