By: Gijsbert Groenewegen
Interest rates are blowing out and the question is who goes first January was the worst month for European government bonds in history with all the bonds blowing out. TCW, the US asset manager that runs world’s largest actively managed bond fund, has eliminated its exposure to Eurozone bank debt over fears these lenders are “excessively risky”. Soon the interest rates will reach crucial levels led by the US. What I mean by that is that the US Treasury 10y rates will reverse the 35-year trend and exceed the 3% level which will cause huge bond losses. The way the US interest rates go the rest of the world goes especially in the intertwined world we are living today. 10-year U.S. Treasuries are resting at 2.45% because the ECB and BOJ are buying $150 billion a month of their own bonds and much of that money then flows from 10 basis points JGB’s and 45 basis point Bunds into 2.45% U.S. Treasuries. A $12 trillion global central bank balance sheet looks permanent and is growing at over $1 trillion a year, thanks to the ECB and the BOJ. Without that financial methadone, both bond and stock markets worldwide would sink and produce a tantrum of significant proportions. Gross believes that without QE from the ECB and BOJ that 10-year U.S. Treasuries would rather quickly rise to 3.5% and the U.S. economy would sink into recession. And with scarcity of supply of long-term government bonds the illiquidity is severely constraining the efficiency of the bond-buying program of the central banks in keeping interest rates down.
By: Gijsbert Groenewegen
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