The media has us all convinced Western Economies are on the verge of a bond meltdown. However, what is really happening is The Great Bond Market Normalisation – a return to real interest rates that reflect the global economy and where nations are. The big risk is that repricing government bonds will crash currently absurd valuations across other financial assets – precipitating a wider market crisis.
Key Takeaways:
The Bond market is not the crisis – worry about what happens to financial asset valuations when the risk free rate normalises after years of financial repression (ultra-low rates). That will hurt. There is a systemic feedback loop of rising rates forcing revaluations.
Current bond yields are not extreme. They are low by historical standards.
Western nations are not going to default on high debt levels, and the fears about bond vigilantes are over-exaggerated. They are magnified by politically motivated media.
Inflation, demand and supply and the economic outlook will be key drivers of rising yields – and always have been, except in periods of financial repression – as we saw from 2008-2023.
The UK is vulnerable due to low growth post Brexit, but its bond market is fundamentally in better health with a longer duration than most. Rising gilt yields have been magnified into crisis by hostile right-wing media and political posturing. Look past it.
Markets are uncertain. Yields are rising. Debt quantums are uncomfortably high... What’s really going wrong in the bond markets?
You can read the Morning Porridge by subscribing on www.morningporridge.com, and have it delivered fresh to your inbox every morning!
Podden och tillhörande omslagsbild på den här sidan tillhör
Bill Blain. Innehållet i podden är skapat av Bill Blain och inte av,
eller tillsammans med, Poddtoppen.
