Bond Watch

The Bank of International Settlements or BIS for short, estimates that G20 total debt, both private and public, is 30 percent higher now than when the financial crisis began. So any ideas that the crisis would see deleveraging to a more healthy level of debt in the global economy have proven to be misguided.

In some ways should anyone been surprised? Ultra low interest rates, QE and other simulative measures have contributed to this increase in debt levels as has “policy guidance,” the idea that Central Bankers actually know what they are doing let alone the belief that they actually control interest rates, have been bought into hook, line and sinker by the herd.

Through this blog we have been at pains to expose the folly of central bank ability, including the myth of their controlling interest rates, the ones that matter to you and I anyway, such as the 10-year sovereign bond yield against which most mortgage rates and pension annuity rates are aligned. A reminder is here:


As can be seen, despite all the promise of “policy guidance” the market has voted with its collective feet and interest rates have shot higher since their lows of mid-2012, a full 18 months ago.

In fact, for the US and the UK, the mid-2012 lows were 200-year lows, aside of being 31-year lows since their respective spikes of 1981, hence the new trend higher is in its infancy.

The price of anything, of course, never travels in a straight line, but a new long-term trend of higher interest rates has been established, with lower bond prices, hence that 30% higher debt levels mentioned above is set to cost far more to service.

How much higher?


 If we look at a chart of those bond yields since their pre-crisis 2007 highs and add a Fibonacci retracement tool to the 2012 lows, one can note some resistance or a backing off at the 38.2% level, which is typical in respect of chart patterns. However, one should expect yields to head for the 61.8% levels and possibly a lot higher, particularly in view of the sheer amount of debt out there, including sovereigns.

A thought to ponder

According to data compiled by Bloomberg, the World’s largest economies need to refinance $7,430,000,000,000 of sovereign debt in 2014 as rising borrowing costs collide with nations struggling to bring down elevated budget deficits. Whilst the bonds coming due for the G-7 nations plus the BRICS are only slightly changed from 2013, the U.S. faces the largest tab, a 6 percent increase to $US 3.1 trillion. The UK, France and China also face an increase, whilst Russia, Japan and Germany will apparently see their refinancing needs fall.

Morale of the story: Forget listening to those Central Bankers and watch bonds.



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