Bonds are acting strange. When inflation was the norm and the world economies were growing, bonds would pay a few percent per year, and had a range of maturities. Some were due in a few years. Some were due in thirty years. Now, near term bonds are more likely to be negative, programmed losses that are considered safer than any other aspect of the financial environment. In response, some investors are willing to accept bonds that don’t mature for much longer, up to a century, in hopes of getting a ‘reasonable’ return. Investment strategies are difficult to judge without knowing the future, so maybe the long play will work out. But, such investors have been;
“swelling the amount worldwide by a record $733 billion this year. It’s more than doubled since 2009 to about $6 trillion, data compiled by Bloomberg and Bank of America Corp. show.” – Bloomberg
And the consequence of so much being invested for so long;
“That means the stakes are high: a one-percentage point increase in interest rates equates to $2.1 trillion in losses for global investors, based on a Bloomberg Barclays sovereign-debt index.” – Bloomberg
Considering that within a lifespan, interest rates have been in double digits, that creates a dangerous exposure. Rates are low now because inflation is low now. Because inflation would raise rates, these bonds are effectively betting on perpetual low inflation or deflation. Few of these scenarios are favorable. The odds of the economy being recognizable in a century are low, considering technological and global changes. A lot of money is acting as if it was desperate. Not a good sign.
(Click on the graph for the link.)
“The Most Crowded Trade in Bonds Could Be Crumbling” – Bloomberg
Pretending Not To Panic 