From Blackstone, August 22:
Sovereign bonds are set to soon join a long list of historical bubbles.
Tulip bulbs, the Dutch East India Trading Company, Japanese real estate, tech stocks, US housing—what these disparate assets have in common is a history of bubbles. Sovereign bonds are set to join that list soon as their bubble nears its end. Last week’s intra-day inversion of the 10Y/2Y Treasury spread signals that yields could go a little lower, though a move much higher is possible. A year ago, the 10-year US Treasury yielded 3.2% and essentially only Japanese bonds yielded less than zero. Today, negative-yielding bonds total over $16 trillion globally, with issuers ranging from Austria to Slovenia.(1) Despite negative rates, massive inflows continue.....MORE
Denial ain’t just a river in Egypt
In 1999, tech stocks defied all logic and valuations. Champions of the frenzy denied fundamental measures of value, calling it a “new paradigm.” In 2007, housing bulls pushed home prices sky-high, arguing that “housing prices never go down.” And at the height of the 17th-century Tulip Mania, one scholar claims that a single tulip bulb would have fetched enough to “purchase one of the grandest homes on the most fashionable canal in Amsterdam.”(2) Today, justification for this sovereign debt bubble includes arguments like “negative rates are normal.” If there was any doubt, one sure sign of a bubble is when people stop questioning whether it’s a bubble.
Investors are playing hot potato
At negative yields, assets perceived to be the safest in the world may actually be among the riskiest. Greece has spent roughly half of its time as a sovereign nation in default, yet today Greek 10-year bonds yield about the same as US Treasuries.(3) Greek bonds are but one example of asymmetric risk. Investors can lose three different ways when investing at a negative yield: 1) lost principal when the investment is held to maturity, 2) less purchasing power due to the effects of inflation and 3) opportunity costs relative to an investment returns more than zero over, say, 30 years (compared to a 30-year German Bund at -0.22%).(4) ....
