Beware the widow-maker

Jul 12 10:07 2019 Print This Article

Over my 25 years in bond markets, there’s always been one trade that becomes known as “The Widow-Maker”. Being underweight long-dated gilts was one, at a time when new pension regulations sent yields plummeting, and shorting the Japanese bond market also became deadly as the Bank of Japan slashed rates to zero. Today, widows and widowers are being made in the German bund market. Yields on the 10 year bund are now trading at record lows: bond investors pay 31 bps per year for the privilege of lending to the German government.

As yields collapse, forecasts and expectations are quickly revised lower. In the wake of Mario Draghi’s ECB speech last week we even saw one investment bank speculate that the 10 year bund yield could fall from that -0.31%, to -2%! Madness? Well Draghi was incredibly dovish, and it’s easy to read his speech as being as important as his famous “whatever it takes” line in the midst of the 2012 eurozone crisis. We’ve already had more than €2 trillion of quantitative easing (QE), negative rates, forward guidance promising to keep rates low, and cheap loans to banks – what more could we possibly get?

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Bond Vigilantes

Bond Vigilantes is here to share the writers views on the things that matter to bond investors – inflation, interest rates and the global economy – as well as to talk about the bond markets themselves. Over the past few years, they have covered topics like value in high yield bonds, the outlook for emerging market debt, and new developments in the inflation-linked bond markets. Being a good bond vigilante should also be about identifying deteriorating trends in corporate behaviour, as well as that of governments.

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