Watch Bonds

by Michael J. Howell21. June 2013 08:19
Bond markets nearly always give more sober assessments than equities. The movements in global fixed income markets in the past two months have it right again. QE or simply more liquidity drive up the risk premia on long-dated bonds (the low risk asset) and drive down the risk premia elsewhere. This is Liquidity Theory 101. If policy-makers anchor the short-end (they do) this beomes a bear steepening. The Central Banks pumping in most liquidity, the Japanese and the US, see the greatest yield curve steepening and those pumping least,the ECB, suffer the least (Bunds). On top, think about real interest rates. These are rising in anticipation of better economic growth in the second half 2013 and, if we are correct, stronger capex. The rise is connected to the end of the Great China Cost Shock we have written much about. This will push up marginal returns on capital and cause real rates to rise. 4-5% bond yields are again on the horizon. This is bullish for everyone else!

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