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Thursday, May 7, 2015

Fixed Income Database Expert List (And Bund-ageddon!)

I was pleased to see that I was included in the list of  "10 Fixed Income Experts Worth Following" by Michael Johnston, published by Fixed Income Database. This  is a new publishing company aimed at covering the analysis of fixed income. The experts are on the bond side of things, as compared to my usual content here which is a mix of economics and bonds. The article is well done, so I will let the readers see the full list over there.


I have not written too much about it, but the rout in the global bond market continues. Even the JGB market has been hit, although the 10-year is still below 0.50% (which is where it was when I hinted that it was stupidly low).

I believe that a few weeks ago, there was popular research that was looking at negative yields across the euro zone, and how the ECB Quantitative Easing (QE) bonds purchases were going to be going into a smaller and smaller pool of bonds. The implicit theory was that QE was going to cause a feedback loop that would drive the entire curve into negative yields.

One of the limitations of my writing about the bond market is that I do not give investment advice here. Therefore, you did not see me telling you to short the 10-year bund at 0.05% (or whatever the low was). But at the same time, I did not tell you that bund yields were on a permanent downward spiral because of QE.

I would argue that one lesson to be learned here is that focussing on short-term market moves is dangerous for the health of your portfolio.

What About QE?

There was a lot of articles published by economists that "proved" that QE lowered Treasury yields by x basis points because they used highly scientific statistical tests. Try explaining what is happening now in the euro govvie curve using that theoretical framework. I think I have seen arguments like the following: "QE lowers bond yields, which raises growth expectation, and now bond yields are rising because of higher growth rate expectations." In other words, Calvinball analysis.

In a world where the 10-year bund sells off 17 basis points on a day with no important fundamental data, the significance of these statistical tests are laughable.

I saw an article (I lost the link) in last couple of days in which bond strategists are arguing the bond market is doomed because of the increasing duration of the U.S. dollar bond market (which the strategists may or may not have corrected for central bank purchases). Previously, we had economists arguing that QE lowered bond yields because the Fed was reducing duration, but they did not correct for the rising supply of duration due to changing issuance patterns. Now we have people arguing yields are going higher because the supply of duration is going up.

The other lesson here is that it is always possible to find convincing reasons to explain the previous month's moves in yields.

(c) Brian Romanchuk 2015


  1. Brian,

    Don't pundits generally express the wrong concept of money flow into investments in equity and fixed income markets, rather than flowing through the transactions, and remaining money on the books of the aggregate bank?

    So when a surplus condition occurs in equity markets the price of equities averages down on an increase in volume. This transfers money to some former owners of stock and stock to new buyers at lower prices. If the money next attempts to flow into and trough the bond markets, what happens to the bond price and bond yields, noting that the money cannot be anything but money unless a bank makes a deal with a nonbank to convert money into interest-bearing bank liabilities or bank equity?

    1. The thinking around "money on the sidelines" is often sloppy. All that happens is that there is a reallocation amongst investors of assets - unless someone borrows to buy investments, in which case balance sheets are grown.

      What "buying pressure" does is cause a relative price shift in favour of what is being bought. Since for every buyer there is a seller, it's not a case of "more buyers than sellers".

    2. A while ago, before studying the mechanics of Fed and bank interactions, I made informal observations of co-movement (coupling) of stock and bond returns. As I recall, in general, during periods of economic expansion returns on stocks and bonds are coupled, so it looks like a positive-sum game. However, at other times, the returns decouple, so it looks like markets are playing a zero-sum game. I suspect it is the expansion of government and/or financial intermediary balance sheets driving the positive sum game.

  2. Congratulations on the recognition as a top fixed income expert. You are certainly my go to person in this field.

  3. Congrats on getting named one of the '10 Fixed Income Experts Worth Following', that's pretty impressive.


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