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We’ll Look Back At This And Cringe, Part 1: European Junk Bonds Yield Less Than US Treasuries
Financial bubbles are the office Christmas parties of the investment world. They start slowly, with a certain amount of anxiety. But they end wildly, with acts and decisions that in retrospect seem really, really stupid.
Millions of people out there still bear the psychic scars of buying gold at $800/oz in 1980 or a tech stock at 1,000 times earnings in 1999 or a Miami condo for $1,000 per square foot in 2006.
Today’s bubble will leave some similar marks. But where those previous bubbles were narrowly focused on a single asset class, this one is so broad-based that the hangover is likely to be epic in both scope and cumulative embarrassment.
This series will create a paper trail for the morning after, starting with a truly amazing anomaly: European junk bonds now yield less than US Treasury bonds.
German Investors
Now World’s Largest Gold Buyers
The past seemed to be catching up with the future following the financial crisis when savers once again began to see their savings disappear. Following the ECB’s decision to slash interest rates German banks began charging customers to hold their cash, and yields on German bunds dropped into negative territory.
It isn’t surprising that that this triggered Germany’s gold shopping spree. This was supported by the country’s growing gold bullion network that has made it easier for customers to buy and store gold bullion and coins.
Their concerns about the banking system drove up demand for the physical, allocated gold products of the 100-150 non-bank bullion dealers across the country. Investor behavior shows that gold buyers are clearly seeking out physical gold that they can take delivery of should they so wish.
It is clear that German investors are not swayed by the ‘newspeak’ the rest of the West seems so taken by. Whilst it is undoubtedly the 2008 financial crisis that set off the boom in gold demand, it is the value placed on gold as a diversifying asset that has sustained the market.
The ratio of investors buying gold bars and coins compared to those selling is around 10:1. This is despite the economy looking healthy and unemployment at its lowest since the 1990 reunification.
I Expect New Record Low Long Bond 
Yield (U.S. Treasuries)
Yield as of 11/7/17
2.80%
Every attempt of the 30-Year long bond to break out of a decades-long downtrend fails.
At the end of October, the long bond yield was 2.96%. Six days into November, it's back at 2.80%. Meanwhile, short-term rates continue to rise.
We are a recession away from a new record low yield on the long bond.
The stock market and the 30-Year long bond yield are at odds. I believe the long bond. If the economy was truly strengthening, the yield on the long bond would not be acting like it is.DYI:
This last article is from Mike Shedlock’s
Global Economic Trend Analysis. One of
his readers responded in the comment section that is well thought out as a very
possible future scenario for asset prices.
Treasuries, along with precious metals, are one of the few remaining asset classes that is negatively correlated to risk assets like stocks, REITs, high yield bonds, etc. If we ever have a prolonged risk off move or a recession, there will be an avalanche of money, both foreign and domestic, trying to get into one of these rare safe harbors. I think yields will ultimately go negative far out onto the Treasury yield curve in this scenario, perhaps even to the 10 year note.
DYI’s averaging formula has a small commitment
with 2% in long term bonds. Bond yield
are now 95% above their long term average – as measured by the 10 year Treasury
Bonds.
My thoughts have not changed. First it will be a deflationary smash as Treasury
bonds soar with yields as far out 5 year notes going negative and possibly out
as far as 10 year maturities. Along with
U.S. stocks from peak to trough declining 55% to 70% AND junk bonds crushed 70%
to 90%! If you thought the Fed’s balance
sheet was bloated you haven’t seen anything yet! Expect massive QE as the Federal Reserve [their
private & have no reserves] buys up treasuries, corporate bonds, stocks
not just the U.S. market the major world markets as well. The Fed’s don’t work for the average citizen
but for their member banks especially New York centered old moneyed interests (Rockefeller’s,
Mellon’s, Warburg’s, Kennedy’s, Morgan’s, Rothschild’s, etc.).
To keep their money machines going asset
prices need to be elevated and modest inflation oscillating 2% to 5% so debt
holders will be able to pay back the interest with cheaper dollars maintaining the
never ending debt based moneyed system going.
Once the banks are rescued, interest and dividends from the Fed’s
portfolio will go straight to the Treasury to help fund all of our massive
social programs as Boomer’s begin to retire.
Not a free lunch, this interest and dividends are pure inflationary as
these dollars to purchase those stocks and bonds were “ginned up” out of thin
air – digitally printed.
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