The Global Bond Bubble Will End In Tears
In the global bond market, a bubble is putting an enormous amount of money at risk. If it bursts, investors will end up in tears. When it comes to media reports, the bond market is often overlooked because stocks are more volatile, so they make for better news. However, several sources confirm that the global bond market is bursting, which will surely shake the world’s markets.
When the Global Bond Breaks
Business Insider reports that $1 trillion is currently at risk in global bonds. Matthew Mish, an expert for UBS, said, “We believe there is a corporate credit bubble in speculative grade credit.” According to Mish, this bubble is developing under corporate bonds and near the lowest level of junk products.
Most industry experts look to the past to get an idea as to how the markets are likely to respond to the bond bubble breaking. The most recent bubble was the one that occurred in the stock market from 1995 to 2001. This one involved technology stock. It took investors more than six months to realize that the tech bubble had burst despite numerous confirmations that stocks were overvalued at the time. In this case, the bubble collapsed slowly and with plenty of fanfare that included rallies. The collapse took place over a three-year period. This may mean that global bond investors have time to protect their portfolios.
How did a Bubble Form in the Bond Market?
Industry experts believe that three circumstances have likely caused the bubble in the bond market. One issue is that central bank support permitted zombie companies to remain in operation. This resulted in the financial institutions carrying over too much debt.
A push toward more speculative debt is another circumstance that’s contributing to the bond market bubble. This push is coming from low-yields in treasuries, which is forcing pension funds and other investments with insignificant returns into riskier debts to meet particular financial goals. Mish addressed this situation. He said, “Investors were herded into lower-quality credit risk for a yield pick-up of a couple hundred basis points.”
The third contributing factor involves global bonds increasing their demand for high yields. This situation made it easy for speculative grade issuers to locate a market for their accumulated debt.
Where Does the Bubble Leave Bond Market Investors?
Bloomberg issued a report about the market. The news source advised its readers that these days, just three things matter in the bond market. These three things are liquidity, liquidity and liquidity. A major concern for investors is whether they can trade their bonds without prices shifting against them. The lack of liquidity is twisting markets in new and unexpected ways. It may be time for bond market investors to consider moving their funds into safer shores.
Too Many Economies in Too Much Debt
The global bond market bubble has been forming for some time. In 2008, the bubble was nearing $80 trillion. At the time, the central banks were facing the option of allowing defaults, which would have given the financial institutions the option of eliminating the garbage debt from the financial system. Instead of taking this route, the central banks tried to inflate away the debt.
This decision has caused the financial system to become more strapped than it was during 2007, which was just before the world’s last debt crisis occurred. Zerohedge reports that since 2008, the global bond bubble has increased by more than $20 million. In fact, its current total is more than $100 trillion, and investors have more than $555 trillion in derivatives that are based on global bonds.
Fostering a Costly Notion
When the central banks did not permit the bad debts to clear out in 2008, they allowed everyone from everyday consumers to worldwide corporations believe that they could control business cycles. Central banks also let everyone believe that the bond bubble remained intact. Because of this, trillions of dollars have been mismanaged. The proof of this is in the form of record amounts of debt.
A lot of this debt is in U.S. dollars, but China’s bond issuance is also out of control. A crash appears imminent. Some experts are saying that the global bond bubble has already started to burst while others believe that time remains. Matthew Mish said, “While this bubble and possible mini-bubbles may not pop this month, we believe their existence justifies our structurally bearish view on corporate credit and preference for higher-quality securities.” If it bursts, it will surely leave investors in tears. To read more about the global bond bubble, visit the PersonalMoneyStore.com.