In bonds there is truth – the crunch is coming

“You’d think you can’t just keep printing money, monetizing debt, and buying bonds, without the dollar imploding. But, maybe you can?” – by Bill Blain

 
Bond markets reflect facts. Equities are about stories. There is a shift in markets underway – where are rates, inflation and politics taking us? Traders want to see certainty – and that will be reflected in bond rates.

In bonds there is truth.

Yesterday a journalist asked me if we should be worried about The Return of The Bond Vigilantes. (Crashing minor chords..) Wow, is it that close to Halloween? Time to bring out the market ghosties, and spook us with horrible stories of bond strikes, soaring yields, creeping term premium, and bond market collapse on the back of childlike fiscal imprudence.

No. I am not worried about Bond Vigilantes. When everyone and his dog is happy to buy Italian government bonds… what’s the worry? (Ask the French how they feel.) I was there back in the 1990s when the Treasurer of GE, then the most powerful corporate issuer on the planet (back when Apple was still a fruit), Jeffrey Werner memorably said “The market has no memory.”

But….. the world is changing…

Over the past few days Global Markets have jumped the tracks – we are heading somewhere new. Markets are beginning to figure the consensus on rates, inflation and bond prices is … increasingly fluid. The new directional trends include:
 

• There is much greater attention being focused on bond yields – they are rising.
• The shape and complexity of the yield curve is being augured for signs of inflation and recession.
• Expectations for central bank easing are diminishing. There are warnings of renewed inflation.
• Big firms like Goldman arguing stocks are unlikely to see the momentum that’s propelled them ever higher since 2009 maintained.
• We’re in for a new market where real interest rates and the bond market will be much more the primary focus.
• Speculation and risk will be constrained.
• Gold just hit another record.
• Never forget – you need power to access your bitcoin wallet.

 
Goldman predicts stocks to return 3% over the next decade, compared to 13% since the Global Financial Crisis, the QE era and over-easy interest rates. That makes sense. Global central banks have been quietly signalling rate normalisation is a key objective – lay your market bets accordingly.

I suspect there is a crunch coming. Put all the data about the sheer scale of government, bank, corporate and consumer debt (about $350 trillion, 3.4 times global GDP), the unsustainability of rising inequality, the rising illiquidity threat to ballooning private capital markets, and ask your AI a simple question: what happens next? Mean reversion?

(For the purposes of balance, and so as not to scare the horses so early in the day: “Things are never as bad as you fear, but seldom as good as you hope”, which is Blain’s Mantra No 2. No 1 is “The Market has but one objective; to the inflict the maximum amount of pain on the maximum number of participants.)

I’ll touch on some market mayhem mitigants is moment, but it probably doesn’t help we’ve so much US electoral noise sloshing around. I can’t help but think the unremitting deluge of reasons why Trump is apparently winning all sound a little suspect, but if you tell a lie often enough, sometimes it becomes a fact. Whatever, it’s clear markets now anticipate a Trump win, and are positioning themselves accordingly. They are picking winners under Trump. More Bitcoin or Truth Social anyone?

Larry Fink of Blackrock was clearly playing politics and looking for a door opener when he said y’day the US election doesn’t matter. The same financial titan who warned us a few years ago that markets were tired of the Trump Chaos, now tells us he is having conversations with Trump and Harris, and he can work with both. If he’s talking to the candidates.. he’s probably talking to the wrong people. It’s the people around Trump that could spell trouble.

Trump is Trump. As long as the electorate vote for him, the details are immaterial. But it’s the details and actions that will count – policy consequences on the Treasury market, inflation and rates matter. I am assured Trump will appoint a highly competent Treasury secretary to the key role. Will next month’s MAGA administration listen? Or will Trump expect the role to be about hammering the Fed into compliance on his will? Peter Theil apparently in the frame for the job… well why not.. he’s paid for it.

This morning Trump is screaming the UK’s Labour Party (also the UK government) is guilty of electoral interference because some activists are advising the Democrats. Fair enough… given that Trump’s close friends Kemi Badenough, Boris and Nigel Farage singularly failed to win the UK vote earlier this year, listening to Labour tacticians probably makes more sense.

Elon Musk’s Ministry of Truth (once known as X or Twitter) is out big this morning, with a whole dawn twittering chorus of how the UK’s Centre for Countering Digital Hate is guilty of a direct communist assault against Him and his running mate Donald J Trump. The UK entity dared to suggest Musk is pushing misinformation about the election. Really? How very, very, rude of them.

Funnily enough, the villain of both Trump and Musk’s complaints about the UK centre around Morgan McSweeney – Sir Keir Starmer’s new chief of staff. To accuse him of undermining democracy in the US is rich. In any other world McSweeney would be a Conservative Wet. His Labour Together is as far to the right of a left-leaning political movement as its possible to be. They are pragmatists. Its no surprise Harris and the Democrats are listing to them.

Declaring a second War of Independence on the UK days before the election, doesn’t bode well for the Atlantic Alliance post Nov 5^th.

Enough politics.

A client summed it up yesterday when he rhetorically asked: Gilts or Treasuries?

That is actually a great question.. The Trusterf*ck of 2022 will long be remembered as the pivotal moment for bond markets. It demonstrated how political competency matters. Liz Truss was right: Growth Matters (I sent her a no-shit-sherlock award for that observation of the downright bleeding obvious). On everything else she was utterly, completely and devastatingly wrong – causing the whole UK gilts market to crumble as the consequences of leverage shot-through it.

What folk forget is how quickly the institutions and infrastructure of the UK Gilts market stepped into to ameliorate and correct the crisis. The Debt Management Office and Bank of England were able to intervene and unravel the crisis before it morphed into conflagration.

When I look at the Gilts market I see a government that has made some pretty schoolgirl missteps in its first 100 days in office, but is showing some political maturity and competence – we will find out more next week when Chancellor Rachel Reeves presents her budget statement. Labour’s majority in parliament ensures they have time to stabilise politics. We also know The Bank and the DMO are two of the most professionally competent institutions in finance. There have been a clutch of articles suggesting the government has debt headroom to borrow more to start rebuilding broken Britain. What it must not do is borrow substantially more to pay for this month’s groceries – the £22bln (now £40bln) blackhole.

The Treasury market is equally professional, but the political pressures upon it are rising fast. I am not particularly worried about the de-dollarisation trade – there is nothing to replace it. Every investment portfolio on the planet is heavily overweight US stocks – it’s the most liquid market, therefore dollars remain in focus. With rate cuts likely to be far more limited than the market expects – the downward pressure effect of lower rates on the dollar will be limited. Stable real rates will be demand positive for treasuries. The US economy is in strong shape, and both consumers and corporate have proved resilient to the double whammy of rates and inflation.

However, what happens post Nov 5^th? What happened in the UK was quickly addressed by the mechanisms of state and the long-term stability of the Gilt institutions. When it comes to the US… I have my concerns… Will keep my Gold Long in place till then.

Out of time, and back to the day job…
 
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