Contemplating Bonds Ahead of The First Hike

This post was written a week ago for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading…

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When it began in 2008, all the world knew was billions and the Lehman Brothers bankruptcy was the largest the world ever knew at US$ 613 billion in liabilities which was only preceded by a previous high of Refco Inc in 2005 at a paltry US$ 74 billion unless we consider Worldcom Inc back in 2002 with US$ 103 billion in assets and just US$ 43.83 billion in liabilities.

We have come to 2015 where trillion is the new billion and the quadrillion beckons, particularly if we are talking in Japanese yen terms. Quantitative easing is the norm for the rich developed world and with the developing markets currently caught in economic quagmires that cannot be said to be of entirely of their own doing when half of their problems revolves around the US dollar’s effect on their currencies and commodity prices which is out of their control even if they are guilty of insufficient reforms, corruption, political woes due to corruption and social woes due to income inequality, crime and let’s not get started.

Well, I do not have the mental energy to write about emerging markets on this hazy day because someone will probably write a book about it after this unprecedented episode of economic history we are living through. Thus there is no better time to bring up the big question mark on the Federal Open Market Committee meeting this Wednesday with a decision expected at 2 am Thursday morning, Singapore time.

FOMC

We have lived through the longest period in history of rate inaction by the Federal Reserve and we have come to the D day, the first hike.

Bonds Make The World Go Round 1

Is it such a big deal ? A 0.25% hike ? Because 50 year interest rates are still well under 3% as we speak after touching a historic low of 2.15% earlier this year and interest rates in the US are still well below 2014 levels, except for the 6 month- 2 year tenors. I attach a graph for perspective, comparison and contemplation.

 

Bonds Make The World Go Round 2

Contemplation is something markets have not been doing much of and the panic in currencies and bonds that is being blamed on the FED this week is rather unfair or rather, just an excuse to ramp up volatility for the hapless investors.

30 Year Bull Run For Bond Markets

Ben Bernanke, the former governor of the FED who orchestrated the QE programs and now an advisor to hedge funds and mutual funds, has said in his first blog post that he would not expect higher rates in his lifetime. He is 61.

By that, he probably means that rates would never go back to pre-Lehman levels and he is probably right for we have sat through a 30 year bull run in bond yields.

Bonds Make The World Go Round 3

Contemplating this graph, I think my instinct would tell me that it is not going to get much better which means that profits are going to be hard to find in the US$ 72.73 trillion global bond market, of which US$ 49.78 trillion comprises of government bonds with half of that coming from America.

 

Bonds Make The World Go Round 4

Central Banks And QE Programs

… to continue reading….