US bond crisis is not alone
I’ve been warning about higher US T-bond yields for some time. Now things are on a knife-edge. Moody’s downgrade and Trump’s “big beautiful spending bill” could tip them over.
ALASDAIR MACLEOD
“Just let that sink in for a moment.
The S&P is more overvalued than it has ever been relative to the long bond than at any time in the last 40-years, and is quite possibly the most overvalued in history.”
You don’t break a 4-decade downtrend without consequences.
Yet this is what US treasury yields did post-covid.
And having done so spectacularly, all we have seen is some consolidation, before the prospect of yields rising even more.
This is clear from our second chart, zoning in on post-covid developments.
This week, the blame for higher bond yields falls on Moody’s downgrading US Treasury debt, presumably having looked at the tax-cuts bill due to go before the House of Representatives in the coming days.
But the truth is that these events are no more than a trigger for the continuation of a well-established bond yield trend which is set to continue.
It’s not just US T-bonds.
Japan’s 40-year JGB yield chart is positively alarming, bearing in mind that the 10-year JGB yields only 1.52%.
These yields are breaking 18-year record levels — just think what that does to government finances with a debt to GDP of over 260%, not to mention the balance sheet of the Bank of Japan which owns nearly 60% of it.
The chart is telling us that the Japanese government is trapped in a major debt trap, only delayed by the Bank of Japan’s massive money-printing.
The UK’s long gilt is similarly signalling danger.
Like the US long bond (4.9%) it hasn’t broken out on the upside yet, but it looks like only a matter of time before it breaks above the 5.5% ceiling.
This is particularly worrying for equity markets, which amongst other things take their valuation cues from both the level and trend of bond yields.
The next chart looks at this relationship.
Rebased to 1985, this chart inverts the US long bond yield to show its close negative correlation with the S&P.
By doing so, we can see when relationships between the two become distorted in the knowledge that eventually the relationship returns to trend.
During covid when the long bond yield fell to 1.15%, relative to the S&P it was wildly overvalued, which corrected when its yield rose to over 2.5% in early-2022.
But the yield kept rising while the equity bull continued, leading to the greatest valuation disparity in the last 40-years, and probably ever.
Just let that sink in for a moment.
The S&P is more overvalued than it has ever been relative to the long bond than at any time in the last 40-years, and is quite possibly the most overvalued in history.
And now we are on the verge of not just a US bond crisis, but a global one with Japan leading the way.
It brings to mind Hemmingway’s aphorism about going broke: gradually then suddenly.
Behind it all are the same factors that collapsed Wall Street in 1929 — the end of the late-1920s credit bubble coupled with the Smoot Howley Tariff Act of 1930.
Ringing any bells yet?
0 comments:
Publicar un comentario