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Global Bonds Suffer Worst Monthly Meltdown as $1.7 Trillion Lost

This is a syndicated repost courtesy of Confounded Interest. To view original, click here. Reposted with permission.

It has been over 30 years since 10 year Treasury yields peaked at 15.84% on September 30, 1981. The 10 year Treasury yield is now 2.406%. That is one heck of a bull market!

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(Bloomberg) — The 30-year-old bull market in bonds looks to be ending with a bang.

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The Bloomberg Barclays Global Aggregate Total Return Index lost 4 percent in November, the deepest slump since the gauge’s inception in 1990. Bonds in Europe extended declines with their U.S. peers as OPEC’s agreement on Wednesday to cut oil production added to prospects of higher inflation. The reflation trade has been driving markets since Donald Trump’s presidential election win due to promises of tax cuts and $1 trillion in infrastructure spending. All this has prompted investors to dump debt that was offering near-record-low yields and pile into stocks.

Calling an end to the three-decade bond bull market is no longer looking like a fool’s errand: the Federal Reserve is expected to start raising interest rates — and do so more often than once a year, inflationary expectations are climbing and there are hints global central banks may be buying fewer sovereign securities going forward. Investors pulled $10.7 billion from U.S. bond funds in the two weeks after Trump’s victory, the biggest exodus since 2013’s “taper tantrum,” while American stock indexes jumped to record highs.

Apart from “OPEC’s intentions to support prices, the broader pressures as regards rising inflationary expectations and the impact this is having in terms of upward pressure on yields is notable,” said Matthew Cairns, a strategist at Rabobank International in London. “The market has moved with remarkable swiftness to price in the anticipated reflationary impact of a Trump administration.”

“This has, in turn, prompted a notable rotation out of fixed income and into equities,” Cairns said. Still, he cautioned that moves are “remarkable given the distinct lack of clarity as regards what policies the president elect will actually pursue.”

November’s rout wiped a record $1.7 trillion from the global index’s value in a month that saw world equity markets’ capitalization climb $635 billion.

The yield on 10-year U.S. notes rose 56 basis points in November, the biggest jump since 2009, and was at 2.41 percent as of 7:07 a.m. in New York. Yields on similar-maturity German bunds reached a two-week high of 0.32 percent, while those on U.K. gilts rose four basis points to 1.46 percent.

The average yield on the Bloomberg Barclays Global gauge climbed to 1.61 percent on Nov. 23, after touching a record low of 1.07 percent on July 5.

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In terms of the 10Y-2Y Treasury yield curve slope, we have seen a gradual steepening over the past month.

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It remains to be seen if President Trump and Congress can pull the US economy out of its Carterish malaise (low wage and economic growth). Particularly since the tools available are reduced after the disastrous credit bubble of the last decade helped double the Federal debt.

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The bond market bubble was a big one, now let’s see if it bursts for real.

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