Bond Markets Feels Like 2007 All Over Again
I’ve been writing regular markets commentary for a long time. If I haven’t seen it all, I’ve seen a lot. But the last few weeks provide a great antidote to ennui. I’ve never seen anything quite like this — and as I lack experience, no, I’m not sure I can explain it or predict what happens next.
Inflation, as we all know now, has a lot to do with this. It’s bad for many things in the economy, but particularly for long-dated stocks. As a general rule, the more of an investment’s value that lies in the future (its duration, in financial parlance), the more it will be hurt by rising inflation expectations.
For the ultimate exemplar, this is how the price of Austria’s “century bond,” which won’t be repaying its principal until the year 2117, has performed since it was issued in 2017
Ten-year Treasury yields have been trending downwards steadily ever since Paul Volcker raised rates enough to cause a recession in the early 1980s.
How is this going to resolve itself? I wish I knew.
I’ve spent much of the last decade or so warning that stocks are a good bet while financial conditions are so easy, but that it may be necessary to get out in a hurry if conditions tighten sharply. They are now tightening sharply.
I’m not going to say confidently that the cheap funds era is over. I learned my lesson a while ago.
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