Timing is everything

In so many things timing is everything. Too early leads to perplexity and too late can mean ”missing the boat.”

In the bond market those who have assumed that interest rates would rise are angry, but the few who forecast lower rates have been vindicated so far this summer.

In September, 2012, a British publication, The Spectator, ran a leading article stating that the bond market was going to burst soon, entailing a significant rise in interest rates. However, yields now are lower now than they were then.

Those who followed that script and took out a mortgage or a loan for some other purpose must be upset.

Clearly, calling the top of an asset bubble is very difficult. History suggests that buying government bonds with yields at 2% usually is not a good proposition. However, those who purchased them perhaps with yields that low have benefitted as yields have remained down; they have profited.

Betting against the current bond market has been a losing game, at least for the time being.

In a sluggish economy as exists now it should be recognized that interest rates are essentially a forecast of short-term rates and government policy moves.

A few see the recent modest rise in interest rates over the summer as an indication that the tide is turning at present. Nevertheless, that small shift is only a modest bounce of the extremely low prevailing rates.

Those with apocalyptic views believe the bond market must see that huge government budget deficits and central bank stimulus will lead inevitably to inflation and higher interest rates reflecting that, with money printing in the United States now proceeding at the astounding rate of $600 million per hour, those assumptions obviously are correct, but the key is eventually.

With yields so low even in the corporate sector, companies have returned to the bond market. For instance, Apple Inc. borrowed $17 billion in the bond market without any pressing need for the funds. At this juncture, yields still are not as low as 2007, when people think a credit bubble emerged.

It must be acknowledged that the decades-long rising market for bonds has had a big impact on investor psychology. It may be a trap.

A surge in inflation, possibly a change in central bank policy, or a corporate debt relapse into a deep recession could prove disastrous.

In a period of economic stress corporate and government bond yields would soar, a ruinous time for all bond holders, but this is unlikely to occur in the immediate future.

 

Bruce Whitestone

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