WHERE HAVE ALL THE BONDS GONE?

Published: 02-09-2015

Apologies to Pete Seeger for stealing his song lyric, but I think bonds and flowers are sufficiently different that he wouldn’t mind.

The chart below (from our friends at Morgan Stanley) shows that net global sovereign bond issuance among the US, UK, Europe and Japan total about $1.2 trillion (first graph). But after central banks get through their bond buying to support the various Quantitative Easing (QE) programs in place, net issuance of sovereign debt is actually negative.

Investors continue to demand holding sovereign debt, but there isn’t any! Because central bankers are buying it all to feed the QE beast. Hence, when we see the lowest yields on French debt since before the French Revolution, the lowest yields on Spanish debt  since the Armada sunk, the lowest yields on Dutch bonds since before tulips were planted there, we should not be surprised. Not surprised, but perhaps worried? This seems like a pretty massive distortion of the market mechanism that (supposedly) efficiently allocates scarce resources through the setting of prices. The very same political leaders who agitate about the coming Armageddon from upsetting the delicate ecological balance that nature has established seem wholly unperturbed with the multi-trillion dollar (and climbing) interference with the market mechanism. Yes, I’m equating the forces of nature with the powers of the markets, and I know it’s not a precise analogy. But I do think we would be wise to approach messing with the markets as cautiously and as humbly as we tempt Mother Nature.

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