Bond vigilantes – where the rubber meets the road – pricing incompetent, “woke”, risible and corrupt governments to account.
You may have noticed the headlines recently about increases in government bond yields in major economies around the world, especially, though not limited to, the UK. whose bond yields have risen to multi-decade highs.
The TLDR version = US a “good” recession imminent with deflation and negative growth reversing sugar highs and rampant past inflation from the sock puppet, Biden’s policies, The UK is heading for negative growth and inflation, typical of failed economies – the worst of all worlds – Germany going nowhere! Sell PIGS bonds buy US bonds, wear jewels! Not investment advice – remember opinions are like noses – everyone has them and they all smell!
Here I will take a look at some of the major government bond markets to provide some perspective and context. I feel qualified to do this as a result of many decades of experience that includes being in the UK gilt market in the late 1970’s when 20 year gilts were trading with a yield of over 15%, in New Zealand when five year government bond yields were over 17% and during the periods of Negative and Zero interest Rae policies (NIRP and ZIRP) used by central banks during financial and economic crashes. I participated in those markets, both as an active investment manager of global government bond portfolios (consistently beating benchmarks and the competition) and finishing up my career as a as part of a team of consulting, actuarially grounded, advisers to the major pension funds in the UK and US. The team of consultants rated every leading investment manager and each of their “products” invested in every major capital market, I ended my career as the US Head of the Global Fixed Income team, based in Chicago, ten years ago.
Ok, with that out of the way, let’s get into the topic of government bonds.
Where do government bonds come from?
In short, whenever a government cannot balance its books, it borrows money – that money has a price, expressed as a yield, which is required by investors. The government uses a Treasury department to issue bonds to pay for the deficit AND to refinance government bonds issued in the past that “mature” in the financial year PLUS the interest payable on all government bonds issued.
“Debt Management Offices” within the Treasury departments liaise with “market participants” to determine the appetite for government debt of specific maturities – usually 2, 5, 10 and 30 yar government debt.
So, government debt comes from fiscal deficit, “rollovers” of maturing debt from prior years and interest owed on the debt.
The yield of short-term government debt – maturing within 5 years, but especially up to two years to maturity, is greatly influenced, if not dominated, by the central bank.
Investors buy government bonds to match their liabilities. Life insurance companies and pension fuds buy the long-dated maturities and “fire and general” and reinsurance companies by shorter – u to five year – maturities. The switch from “defined benefit” provided by big companies to “defined contribution” schemes such as personal 401k plans fast shifted responsibility for matching retirement plans may have changed, but the goal of maximising returns, for the least risk and cost has not.
Historically, pension funds target a return equal to the 10-year government bond yield plus a risk premium of a few 2-3% extra from equities and other investments. The expression of this in the old “60:40” balanced portfolios has not changed that much. For defined benefit company pension schemes, the UK is a world leader in Liability Driven Investment has used derivatives (swaps) to match inflation linked liabilities by using government bonds as collateral for 20 to 50-year inflation linked pension liabilities.
The other major investors in the government bond markets are banks – who hold positions mostly in the short end – but attempt to make money by trading every maturity against derivatives markets (such as futures, options and swaps), such as swaps. Banks also use government bonds to swap collateral that secures the profits and losses of risk positions and the “repo” market to maximise interest earned in overnight and longer short-term markets.
Investors need to at least preserve the value of their investment AFTER inflation “real” value – especially where pensions are inflation linked. Investors also, unsurprisingly, want their money back plus the interest promised at the time of the initial investment.
You can view the current ten-year government bond yields as the annual compound equivalent of 10 one-year government bonds – any deviation from this results in an arbitrage opportunity against the “strip curve” of zero-coupon bonds. The “coupon” is the rate of interest due on the bond. All those coupons must be reinvested at an uncertain future rate as markets change over time – using a zero-coupon investment eliminates any reinvestment risk by discounting a single future value to a present value.
Apologies for that migration to the “world of wonk”!
So, the yield of government bonds is determined by supply and demand, current and expected inflation, the central bank, the rime horizon (more yield for tying up money for longer), and the cumulative probability of default. There may also be a “liquidity premium” if buyers and sellers disappear and price “discovery” is difficult,
Here’s z link top current ten-year government bond yields across the world.
https://markets.ft.com/data/bonds/government-bonds-spreads
Remember there are similar lists for central bank rates, 2-year, 5 year and long bonds of 20-to-30-year maturities.
The Canadian ten-year government bond is omitted but is around 3.25%.
US, UK, Australian and New Zealand ten-year government bond yields are all around 4.7%. Swiss government ten-year bond yields are under 0.5%%, German “bunds” are 2.6%.
All European national ten-year government bonds aw “priced” relative to the German yen year “bund”.
Surprisingly, this has resulted in the PIIGS (Portugal, Italy, Ireland, Greece and Spain) yielding much less than the “US dollar bloc” countries plus UK). Greek ten-year government bonds yield under 3.5%, Italy 3.8%, Ireland 2.9% (despite guaranteeing its entire banking sector!), Portugal 3.1% and Spain 3.3%.
The ten-year government bond yields of the US dollar bloc plus UK are ravelling at almost 2% more than those of the basket cases of the EU!!!
The prospects for inflation, the fiscal outlook, investor attitudes etc must be very different in the EU!
Side note: Trump joins Christine Lagarde, head of the European Central Bank in the ranks of convicted felons!
Christine Lagarde: IMF chief convicted over payout - BBC News
Heer’s my personal opinion on the outlook for the US, UK and Germany.
There’s a little more background here:
I can’t help but get the impression that the yields are somehow correlated to the various C19 scamdemic governments’ responses in some way – fiscal deficits from ruinous and unnecessary C19 policies and treatment protocols!
For the US, we await to see how successful DOGE can be in reversing the enormous “black hole” created by the corrupt and incompetent left-wing lunatics that have engaged in the intentional destruction of the US. We can check up on the first three months of the US fiscal year when this gets updated for December 2024.
https://fiscal.treasury.gov/reports-statements/mts/current.html
The statement for December 2024 will show just how many gold bricks have been thrown off the Titanic in the desperate, flailing death throes of the unconvicted criminal squatter in the White House – in a little over one week!
The major impact will be DOGE’s identification and reversal of corrupt spending, the expulsion of immigrant beggars sucking the life out of the US population and economy. Hopefully, not only will corrupt spending be removed, but the inflationary impacts of massive fiscal spending will also be reversed, led by energy and food prices that can return to pre-scamdemic levels. Current inflated prices must be reversed to close to 2019 levels.
The massive economic and security benefits from “Operation Round-up and Deport” will not be felt until 2026, when, if successful, will add at least a trillion bucks to the economy – 3% of GDP.
I see deflation and negative growth from numbers rigged by the Administration via insane “net zero” regulations and spending cuts. which should see ten-year government bond yields fall below those of the EU’s PIIGS by the end of 2026.
For the UK, her picture is worse than bleak and a crisis is imminent this year. the tax and spend policies, on top of a precarious position are only gig to lad to default and panic.
40 billion pounds of tax increases, an increase in minimum wages and large pay awards to train drivers, for example, are precisely what has long been proven to lead to stagflation. I expect rising unemployment and inflation to bury the Chancellor of the Exchequer – Rachel from Accounts – and her boss, Prime Minister Keir Starmer in the pile of crap they created. An increase of 14% in utility bills in the las three months will be a major contributor to inflation and negative growth.
The stealth tax on consumers via fascist tactics combining the “energy regulator”, with energy companies and the government to force price rises are a backdoor tax to fund “net zero” policies.
The UK will not expel its 2 million migrant beggars’ and instead will build them houses on the taxpayer’s dime – not yet hitting the press! Note the typical backsliding by Rachel from Accounts. She says she is being responsible - and taxes won’t go up, instead plans are in hand to borrow a quarter of a trillion pounds to build 150,000 houses a year for each of the next five years!
For Germany, it is being housed on the “net zero” petard. while being one of the few EU countries that is actually sticking close to the terms of the Maastricht Treaty, limiting fiscal deficits to 3% of GDP and government debt to 6%0 of GDP. As the expensive “net zero” policies work through, hey diminish the available spending on public services, I expect major political upheaval – around the AfD policies – but a continuation of lower inflation and growth than the US, but not much significant change – unless Germany can secure Russian hydrocarbons,
Lastly, I continue to be disappointed with the lack of the application of risk management tools of the of the investment and banking industry to the medical industry. Investment managers and banks use extremely powerful data and statistical analysis tools to quantify the risk of transactions and investments. Tools like VaR (Value at Risk), option volatility surfaces, information ratios etc that I believe can also be used to assess “Lives at Risk” and Morbidity Risk for key killer diseases for each population cohort. It was declared a national emergency and the deaths and harms from the experimental C19 injections, represent another emergency. So much for “all hands to the pumps”.
Onwards!
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