This Might Not Be the Biggest Bond Bubble in History
Where Bill Gross and Paul Singer think alike
Much like Bill Gross, Paul Singer is a critic of the Fed’s ZIRP (zero interest-rate policy). He holds it responsible for the risks that the economy is currently facing. While Bill Gross thinks that the Fed has become “increasingly addled” and that every asset price is artificially elevated, Singer also thinks that market prices and the prices of many asset classes have been distorted as a result of the Fed’s ZIRP.
Persistent low or negative yields on sovereign debt have led to “the biggest bond bubble in world history,” according to Singer. It has come to a point where he sees the global bond market as “broken.”
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Negative yield, death to your capital
The bubble has been led by a peculiar class of investors who are continuing to invest in the so-called “safe-haven sovereign debt,” which is currently promising negligible or no return at all. Some are even quoting at negative yields! About $12 trillion of the government bond market (TLT) (SHY) currently trades at a negative yield. Singer’s advice to those who hold bonds (BND) (AGG) (LQD) with negative yields is to “Hold such instruments at your own risk; danger of serious injury or death to your capital!”
Gross has also been critical of negative rates. He said that “investing in negative interest rates is guaranteed losses.”
Fixed income is now a policy tool
A very interesting and contrary view coming from Salman Ahmed, chief investment strategist at Lombard Odier Investment Management (as reported by CNBC), is that “fixed income is now a policy tool. It is not an asset class anymore, especially sovereign bonds and I think we have to get used to it.”
Since deep-pocketed central bankers are the biggest players in the bond market currently, a bubble and sudden collapse in the bond market doesn’t seem likely. The logic is simple. If the market seems to be falling short of liquidity, these bankers, with unlimited access to (printing) money, wouldn’t let the market dry out of credit or result in a collapse.