Japan

The Bond Bear Market

Is Now International!

The two decades Sins of Financial Repression has awaken the Worldwide Bond Vigilantes!

Japan’s central bank running the printing presses to suppress interest rates to allow their officials to run massive budget deficits.  It’s all fun and games until someone gets hurt and that hurt is a falling Yen!  Prices for imported raw materials and finished goods have moved up in price significantly slowing Japanese GDP along with inflation all borne by the Japanese people.  In other words the free lunch Japanese officials thought they had for 2 decades the bill has arrived in the form of a free falling Yen.

This has killed off the Yen carry trade.

Investors would borrow in Japan at their sub atomically low interest rates and then use those monies to buy U.S. Treasuries notes and bonds along with corporate bonds plus stocks.  That game is now in the unwinding stage as investors sell seeking buyers for their assets.  This will put upward pressure on U.S. rates as this unwinding runs its course.

So far this has not affected stocks in any material fashion however Treasuries and especially long term investment grade corporate bonds have sold off making their current yield very competitive with stocks.  Vanguard’s ETF Long-Term Corporate Bond symbol VCLT current yield is 6.16% as compared to Vanguard S&P 500 index ETF symbol VOO with its tiny dividend yield at 0.98%! 

(6.16 – 0.98) ÷ 0.98 X 100 = 529% (rounded) greater yield than the S&P 500 index!  Investors – who are now actually speculators – is in the precarious position of not just expecting higher stock prices but are now demanding.  As I’ve stated before IMO bonds over the next 10 to even possibly 15 years will outperform stocks!

This is especially true for those with more than 15 years to go before retirement dollar cost average into a long term investment grade bond fund.  During growth periods rates will move upward in a saw tooth manner and during recessions rates will bottom at higher lows.

Till Next Time