"Historians will judge the era of negative yields as madness" ..... after just three months, it's already looking that way.

Thursday 11th June 2015

 "Historians will judge the era of negative yields as madness" ..... after just three months, it's already looking that way.

 "Bond crash is early warning as end to zero rates looms" , Viewpoint by Ambrose Evans-Pritchard, The Daily Telegraph, p.B2

Hold on to your hats, it's all beginning to look very dark out there. German 10yr Bund yields hit a high yesterday of 1.05 basis points, having traded at 0.05bp as recently as March. The 10yr US Treasury yield has jumped 48bp to 2.47% in the last eight trading sessions. Yields in emerging markets are rocketing.....

Even senior traders are admitting that they were sucked into the "easy money" deflationary trades that saw them buy bonds at ridiculously high levels in the expectation of being able to turn them for a profit into central bank QE programmes, and that they were also too slow to get out of them. They're getting out now, all right.

Remember the "taper tantrum" of 2013, when comments by then Chairman Bernanke that the Fed might begin taper off its asset-buying programme (QE) caused a bond market crash ? Well, now the talk is of a possible "triple taper tantrum", when a tailing off of QE programmes in the US, Eurozone and Japan might combine to produce even more destructive effects for bond markets. As we said yesterday, the jury is still out in Japan but recent data elsewhere suggesting increasing money supply**, receding deflationary fears and a return to growth might support that theory.

Theoretically the doomsday scenario is one where a bond market Armageddon might provoke global recession and deflation. In other words, back where we started, but this time without the fiscal and monetary ammunition to do much about it. Much will depend on the pace of rate rises in the US. Worryingly, whilst the Fed are predicting rates of 1.875% for late next year, futures markets are pricing in only a rate of 1.25%. The capacity for shocks is plain to see, and central banks will need to get it just right to avoid them.

**NOTE : The link between Money Supply, QE and Inflation .... simply ,please !

There are numerous narrower and broader measures of money supply, but essentially it is a measure of the amount of currency in circulation in an economy at a particular time. Economists argue over how direct the link is between increased money supply and inflation, but historically speaking and in terms of general perception increasing money supply IS inflationary.

Quantitative easing, or QE, is a programme of central bank asset buying (bonds, mortgage-backed securities etc). It is quite often referred to as printing money but this is NOT the case. By buying assets, central banks take those assets out of the system and replace them with cash  --  this does not increase the money supply but does inject liquidity designed to increase bank lending, investment and consumer spending. Therefore, it too IS inflationary.